Cigarette fee challenge prompts debate

"MN Governor"

09/02/2005

Conrad Defiebre,
Star Tribune
September 2, 2005

Faced with what some legal observers consider a plausible legal challenge to the linchpin of a two-year state budget, state officials are trading blame, talking tough and pondering options for filling a potential revenue gap.

The $401 million question is whether the state’s new 75-cent-a-pack “health impact fee” on cigarettes is a bungled attempt to double-dip damages already resolved in a multibillion-dollar settlement with tobacco companies seven years ago.

The answer will be forthcoming in a Ramsey County District Court action brought by tobacco companies to nullify the cigarette levy. If the industry wins, smokers will get a reprieve from higher prices, but the state will face a sizable hole in revenues that support education, law enforcement and many other functions besides health care for sick users of tobacco.

The first hearing, before District Judge Michael Fetsch, is set for Sept. 27.

Meanwhile, the dispute is spurring speculation among lawyers over its outcome and a lively renewal of the political debate surrounding the fee and Gov. Tim Pawlenty’s no-new-taxes pledge. Sometimes the same people take both sides.

“Whoever at the tobacco companies thought this up must have been smoking something, and it wasn’t their own products,” opined Mike Ciresi, the Minneapolis lawyer who negotiated the 1998 settlement that tobacco firms now cite in their effort to scuttle the fee. “It’s going nowhere,” he said.

Ciresi, a DFL activist who is mulling a second run for the U.S. Senate, also threw in a shot at legislators and the Republican governor: “They may call it a fee, but it’s a failure of leadership in this state.”

Pawlenty’s office, while echoing Ciresi’s prediction of victory in court, has suggested that a warning about possible legal challenges should have come from DFL Attorney General Mike Hatch, who is expected to challenge Pawlenty for reelection next year.

“This litigation is completely without merit,” said Pawlenty spokesman Brian McClung. “The settlement bars future lawsuits, but it does not and cannot bar future legislation.”

Fee or tax?

Some legal experts, however, see more chance for the tobacco companies.

“I think they’ve got a colorable argument,” said Minneapolis attorney Ron Meshbesher, who once represented smokers in an unsuccessful effort to gain part of the tobacco settlement. “Whether they’ll win or not is another story. I think the court will end up being more sympathetic to the state than to the tobacco companies.”

Hamline University law Prof. David Schultz said the case will hinge on whether the court views the levy as a fee, as it is described in statute, or as a tax, which many say it is.

“It’s not a totally far-fetched lawsuit,” Schultz said. “If it’s a tax, there’s no problem. But there’s a better than even chance that it would be declared a fee.” Then, he added, it’s even money whether the settlement would be upheld as applying to legislative action as well as to further damage suits.

The distinction between taxes and fees, which has been a foundation of Pawlenty’s fiscal policies, hasn’t been lost on the tobacco companies, either.

Although many states have raised tobacco taxes in the years since they made Minnesota-style settlements with the industry, none has faced similar court action, said Bill Phelps, spokesman for Philip Morris USA, one of three cigarette makers and nine distributors who filed the current motion.

But Phelps also said it doesn’t matter whether the Minnesota levy is a tax or a fee, because the statute specifically says it was imposed “to recover for the state health costs related to or caused by tobacco use.”

That, he said, directly violates the state’s settlement promise to forgo “any future claims for reimbursement for health care costs allegedly associated with the use of or exposure to tobacco products.”

Follow the money

Hatch, however, noted that, despite the statute, the new revenue “isn’t going into any fund that helps anybody relating to tobacco. They’re using that money to pay for education.”

As for his alleged failure to warn other state officials of possible legal problems, Hatch said no one in the Legislature or governor’s office asked his opinion on the matter. When he has offered advice, Republicans have ignored it, he added.

“They never have been particularly interested in our input, and I don’t know how we would have been able to give input had they asked,” Hatch said, noting that thousands of bills are considered in the Legislature each year. “There’s no way we should have gotten involved.”

The state’s tobacco settlement was entered into by Hatch’s predecessor, Hubert Humphrey III.

Rep. Jeff Johnson of Plymouth, a lawyer who is seeking the Republican endorsement for attorney general next year, said the tobacco firms’ motion “seems a bit of a stretch to me ... but I think there’s a straight-faced argument to be made.”

Johnson voted against the fee in the House on July 13.

Rep. Ray Cox, R-Northfield, introduced the idea of styling an increased tobacco charge as a fee instead of a tax in February, “because of the governor’s stand on taxes,” he said. “It was out there a long time. If somebody got all worked up about it, you’d think they’d have said something. Maybe they didn’t want us to fix it.”

Cox, who is not a lawyer, offered no predictions of the outcome in court, but he said it may not matter in the long run.

“If the tobacco companies press their case and win, it seems they’ve told the Legislature what the remedy would be, which is to make it a tax,” he said. “I think that would happen because there aren’t a lot of other revenue sources out there.”

McClung declined to comment on whether Pawlenty would support such a response, but Cox said the tobacco firms’ courtroom assault “would have given him all the cover he needed.”