Judge throws out cigarette fee

12/21/2005

THE REACTION: Pawlenty vows to appeal; House GOP leaders are in no mood to pass the 75-cent fee as a tax.

FOR SMOKERS: It’s unclear when — if ever — they might see the cost of a pack of cigarettes reduced.

BUDGET OUTLOOK: The fee was needed to balance the budget, but with a surplus now forecast, the loss could be absorbed. ‘Health impact’ charge ruled unconstitutional, a violation of ‘98 tobacco settlement.

BY PATRICK SWEENEY and BILL SALISBURY
Pioneer Press

Minnesota Gov. Tim Pawlenty and lawmakers are looking at a $400 million hole in the state’s budget after a new 75-cents-a-pack “health impact fee” on cigarettes was declared illegal and unconstitutional by a judge Tuesday.

Ramsey County District Judge Michael Fetsch said the fee, which some legislators called an ill-disguised tax, violates terms of a multibillion-dollar court settlement the state and three tobacco companies struck in 1998.

“The state is bound, like any other party, to the contracts to which it freely and knowingly enters,” Fetsch said of the court settlement.

For smokers, it was unclear if the ruling would ever result in a decrease in the cost of cigarettes. Pawlenty said he will seek to appeal the decision to the state Supreme Court.

The ruling was a political embarrassment to Pawlenty. He made a 2002 campaign promise to veto any tax increase, then in May backed the 75-cent cigarette charge. At the time, he insisted it be structured as a fee, not a tax. Now some legislators, both Democrats and Republicans, say he tried to be too cute.

“The governor’s verbal gymnastics didn’t fool anyone,” House Minority Leader Matt Entenza said in a statement. “The public recognized this so-called fee was, in fact, a tax. The state wouldn’t be in this mess right now if the governor had simply been honest and up-front with the public about what he was doing.”

The St. Paul Democratic-Farmer-Laborite refused to say if he would support turning the illegal fee into a legal tax.

Pawlenty, in a statement, accused Fetsch of making a “significant error” in concluding the Legislature was bound by the 1998 deal struck by then-Attorney General Hubert Humphrey III.

Fetsch’s ruling leaves Minnesota facing a $400 million reduction in the big projected budget surplus the state now enjoys for its current two-year budget cycle. Wholesalers who have paid the fee since August are entitled to refunds, Fetsch said.

The new 75-cents-a-pack charge was a key element of the special-session deal between the governor and lawmakers in July that balanced Minnesota’s budget and allowed public schools to receive a big increase in state funding.

The ruling seems to leave Pawlenty and lawmakers with four options:

• Appeal the ruling, as Pawlenty said he wants to do, and hope for a different result.

• Re-pass the law to change the fee into a legally permissible excise tax increase.

• Try to keep the 75-cent charge structured as a fee, but impose it at the retail, rather than wholesale, level — a change Pawlenty said would make it legal.

• Accept the ruling and use part of a projected $701 million budget surplus or money from a related $317 million “tax relief” account to make up for the lost revenue.

Three big tobacco companies — R.J. Reynolds, Philip Morris and Lorillard — and nine cigarette wholesalers challenged the fee in court. They argued that the state reneged on the out-of-court deal it made with cigarette manufacturers in 1998.

That deal called for the tobacco companies to pay the state, in perpetuity, for past and future health costs.

Nevertheless, the 75-cent health impact fee was enacted as a vehicle to reimburse the state for smoking costs and to influence young people to quit smoking.

Fetsch rejected the state’s argument that the Legislature was free to ignore the 1998 deal and impose new health-related charges on tobacco companies. He said the Legislature gave its approval to the earlier agreement by spending money the tobacco companies paid to the state.

Much of the debate in the Legislature in the summer special session was about whether the new 75-cent charge is a fee or a tax. Pawlenty called it a fee. Many lawmakers, including some Republican allies of the governor, said it is a tax.

Fetsch, in his ruling Tuesday, said the 75-cent charge is clearly a smoking-related fee, which the 1998 settlement barred. He also said it would have been fine for the Legislature and Pawlenty to increase the current 48-cents-a-pack excise tax on cigarettes.

“All parties agree there would be no basis to override such a tax,” Fetsch said.

Pawlenty issued a statement that said:

“The judge made a significant error by ignoring the principle of separation of powers which is the Legislature’s authority to independently make decisions without being bound by prior agreements by the Attorney General.”

Pawlenty said he was considering taking administrative action, without new legislation, to apply the fee at the retail, rather than wholesale, level. He said that would be “clearly allowed” under the law.

Attorney General Mike Hatch, who represented the state in arguing the cigarette fee is legal, did not comment on the case. “We are still reviewing the decision and are not prepared to comment at this time,” said Leslie Sandberg, a spokeswoman for Hatch.

Some Republicans joined Democrats on Tuesday in scolding Pawlenty for the way he handled the tax vs. fee debate. “This just demonstrates that, when we’re legislating, we should call it what it is,” said House Tax Committee Chairman Phil Krinkie, R-Lino Lakes, who opposed the fee and asserted it was a tax.

Krinkie and Rep. Jim Knoblach, R-St. Cloud, the chairman of the House Ways and Means Committee, said they opposed replacing the fee with an increase in the current cigarette tax.

“My first reaction is it’s a good thing we’ve got a billion-dollar surplus,” Knoblach said.

David Strom, president of the Taxpayers League of Minnesota, whose no-new-taxes pledge Pawlenty signed in 2002, said increasing taxes now would be bad policy and bad politics.

“I don’t think that the governor or Republicans want to go into an election year with an unambiguous policy statement that they’re for higher taxes,” Strom said. “If they do, they’ll probably feel the results at the polls.”