Supreme Court upholds cigarette fee

"MN Supreme Court"

05/16/2006

BY PATRICK SWEENEY
Pioneer Press
May 16, 2006

The Minnesota Supreme Court today upheld a 75-cents-a-pack fee on cigarettes that legislators and Gov. Tim Pawlenty enacted last summer.

The ruling is a victory — both in terms of policy and politics — for Pawlenty.

If the court had struck down the fee, it would have left a $185 million a year hole in the state budget.

In political terms, it absolves Pawlenty from criticism by his Democratic-Farmer-Labor opponents that he endangered the budget by trying to be too cute in labeling the cigarette charge a fee.

Pawlenty signed a 2002 campaign promise to veto any tax increase but proposed the fee as a means of increasing funding for public schools. He insisted the 75-cent charge be labeled a fee and characterized it as reimbursement to the state for state-paid health care costs for smokers.

Many of Pawlenty’s DFL opponents, and even some of his Republican allies, have argued since last summer that the fee was only a poorly disguised tax. The Supreme Court upheld the charge without deciding whether it is a fee or a tax.

“Neither the label ‘tax’ or ‘fee’ nor the specification or lack thereof for spending the funds so generated is relevant,” the court ruled. “Either way, the revenue measure would be an exercise of the legislature’s sovereign power…It matters not whether the particular power negated is the taxing power or the police power.”

For cigarette wholesalers, who paid the fee, and for the smokers whom they passed on the charge to, the ruling today means they will not receive refunds.

The court concluded that smokers, not the cigarette manufacturers or distributors, “bear the economic burden of the health impact fee.”

The ruling is likely to spark a fight in the Legislature’s last week over $317 million in possible tax relief. Lawmakers, especially House Republicans, offered several plans for using that money, but felt compelled to keep the money in reserve in case the Supreme Court ordered the state to rebate fees that have been passed on to smokers since last August.

Pawlenty has expressed support for two alternate House Republican proposals, one that would use the $317 million to provide 9 percent property tax rebates to Minnesota homeowners this fall, and one to drop the state’s 20-cents-a-gallon gas tax from July 1 through the end of this year.

Senate Democrats have proposed spending most of the $317 million.

Last August, the fee was challenged in court by three big cigarette companies. They argued the fee conflicted with a 1998 court settlement in which then-Attorney General Hubert H. Humphrey III settled past and future claims against the tobacco industry for health-related costs borne by the state in return for a stream of payments that has already topped $2 billion and runs forever.

In December, Ramsey County District Judge Michael F. Fetsch ruled in favor of the companies.

Fetsch, who agreed with Pawlenty that the charge was properly designated a fee, rejected the state’s arguments that the 1998 settlement language applied only to court claims. He said the 75-cent fee “clearly violates” the settlement. “The state is bound, like any other party is bound, to the contracts to which it freely and knowingly enters,” he said.

The Legislature was perfectly free to raise the cigarette tax, but was barred from imposing a fee aimed at recovering costs related to smoking, Fetsch said. He also said the lawmakers, although they did not explicitly ratifed the settlement, gave it tacit approval by spending part of the tobacco payments.

The Supreme Court ruled that agreement Humphrey signed did not explicity give away the Legislature’s power to impose future charges on cigarettes, regardless of whether they were fees or taxes.

“We conclude that the imposition of the Health Impact Fee does not violate the settlement agreement because the terms of the settlement agreement do not unmistakably relinquish the state legislature’s sovereign authority to impose such an exaction on tobacco products in order to recover health care costs related to the use of tobacco products and to discourage smoking,” the court said.