A series of tobacco tax hikes are helping to curtail local sales of cigarettes and cigars.

Through the first 10 months of the year, Hawai'i consumers bought 417 million packs of cigarettes, which, based on state tax collections, was down 12 percent from the same period a year ago.

While lower consumption of tobacco has health benefits, it could be problematic for a state that's counting on recent tobacco-related tax hikes to generate nearly $47 million in added revenue over two years to help balance the state's budget.

Higher tobacco taxes are aimed at driving down demand while simultaneously increasing income for the state and for programs such as cancer research. So far it's been a formula that has delivered — sales of cigarettes statewide have been declining in recent years and the increased tax rates have more than offset the reduction in sales.

However, state tax hikes, coupled with federal tobacco tax increases, may be starting to jeopardize that revenues stream.

"I think we have reached the cross-point," said Lowell Kalapa, president of the nonprofit watchdog Tax Foundation of Hawaii. "It's gotten to the point where people are actually quitting ."

Through the first five months of the fiscal year, total cigarette tax collections are up $3.8 million over the same period a year ago. However, the state is counting on even faster growth in cigarette tax collections.

The state was planning to get a boost of nearly $2 million a month in added cigarette taxes between July 2009 and June 2011. That excludes about 30 percent of collections that pay for cancer research, emergency services and other needs.

That money was projected to come from a 40 cents per pack increase in state taxes on cigarettes, to $2.60 a pack on July 1.

The state tax on cigars also rose, from 40 percent to 50 percent of the product's wholesale price.

However, because of a glitch in the law neither tax hike took effect until October. During October — the first month tax increases took effect — total cigarette tax collections fell $2.4 million to $7.8 million compared with October 2008. Other tobacco-related tax collections — including taxes on cigars — fell by $236,715 to $54,053 during the same period.

$8 TO $9 PER PACK

Declining tobacco-related sales may be partly tied to a prolonged economic slowdown. They also coincide with a series of state cigarette tax hikes that raised the tax on a pack of cigarettes by $1 since 2007. Local tobacco tax increases were augmented by a 62 cents per pack hike in federal taxes on cigarettes, to about $1 a pack.

Clearly, those increases are cutting into consumption of tobacco products, said George Massengale, director of government relations for the American Cancer Society in Honolulu.

"There is a strong correlation between the increase of tobacco and cigarette taxes versus consumption," he said.

Massengale added that eventually tobacco tax increases will result in lower revenue as people cut back on smoking.

"Hypothetically, raising the cigarette tax (another) $1 per pack — that might cause a decline and you might see a drop in tax revenues," he said. "That was the political question over the last few years. Obviously we haven't reached that yet."

As of November, Hawai'i had the fifth highest cigarette tax in the United States, according to the National Conference of State Legislatures. Rhode Island, Connecticut , New York and New Jersey led the list.

Hawai'i's tax hike has helped push the retail price of major brand-name cigarettes to $8 to $9 for a pack of 20 cigarettes. That hasn't caused smokers such as Kaka'ako resident Michael Zehner to quit. However, it is causing others to find cheaper sources of cigarettes, he said.

"I pretty much smoke the same," Zehner said. "I try to follow the law as it's written (but) I have heard of other people that have turned to black-market sources, that have switched to cheaper brands (and) also getting them from friends in the military" or through the mail, he said.

'A DEVIL'S BARGAIN'

It's too early to say whether Hawai'i's tax hikes will fall short of generating money the state needs to pay for essential programs , said state Rep. Marcus Oshiro, D-39th (Wahiawa), chairman of the House Finance Committee.

"It's something that we need to be mindful of," he said. "Maybe we need to adjust that particular revenues stream (estimate) given that there may be a curtailment of the actual consumption of cigarettes, which is good.

"It has always been a devil's bargain because you do rely upon tobacco revenues to fund critical and essential services," Oshiro said.

Most — about 70 percent — of the tax generated from cigarette and tobacco sales goes into the state's general fund. Four cents of the tax on each cigarette goes to other sources, including 2 cents a cigarette that goes into the Hawaii Cancer Research Fund. That helps fund the Cancer Research Center of Hawaii. Through the first five months of the current fiscal year, tobacco tax collections for the Hawaii Cancer Research Fund dipped to $5.7 million, versus $6.1 million during the same period a year ago, according to the state tax department.

The tax foundation's Kalapa said the state needs to choose whether it wants to stop smoking or preserve a valuable tax revenue stream.

"What is the message we're sending? Is it quit smoking, it's bad for our health, while on the other hand we say smoke some more because we need money to run the cancer research center," Kalapa said. "What are you trying to do? Are you trying to stop smoking, or are you trying to increase revenues?"