Ramsey County judge strikes down new cigarette fee

12/20/2005

December 20, 2005, (AP) - Minnesota’s new 75-cent-per-pack charge on cigarettes was struck down Tuesday by a Ramsey County judge, potentially punching a big hole in the state budget.

As part of a budget approved this summer, lawmakers were counting on more than $400 million over two years from the so-called health impact fee.

Lawyers for cigarette makers argued that the fee violated a 1998 tobacco settlement that funneled billions of dollars to the state to cover health costs caused by smoking. That settlement also banned future claims on tobacco companies.

In proposing it, Gov. Tim Pawlenty insisted on calling the charge levied at the wholesale level a “fee’’ so he could continue to claim he hadn’t broken a pledge to raise taxes.

He called for an immediate appeal to the state Supreme Court. “We will also consider using existing administrative authority to apply the fee at the retail level of sale, which is clearly allowed,’’ Pawlenty said in a written reaction to the ruling.

If those steps fail, state leaders could fall back on more than $1 billion in surplus and reserve funds announced in November.

In declaring the fee unconstitutional, Ramsey County District Judge Michael Fetsch ordered the state to pay refunds or give credits to the suing tobacco companies for fees paid since the law took effect in August.

Fetsch said the way the fee was crafted violated the 1998 settlement. He also said the fee would be selectively enforced if it only applied to cigarettes not part of the earlier settlement.

“The purpose of the legislation was to recover health-related costs and to prevent tobacco use by youths,’’ the judge wrote. “They will cease smoking the more expensive cigarettes and buy the less expensive cigarettes from the settling defendants’ distributors.’’

David Howard, a spokesman for R.J. Reynolds Tobacco Co. and the other plaintiffs, said he hadn’t seen the ruling and couldn’t comment in detail.

“Clearly we’re pleased with the judge’s decision, and it certainly supports the position and the case that we made, that this health impact fee violated the terms of the settlement with the state,’’ he said.

Howard declined to speculate on whether the fee would have been upheld if it had been called a tax, or on whether the state has the authority to apply the fee on the retail level as Pawlenty claimed.

Rep. Matt Entenza, DFL-St. Paul, was quick to criticize Pawlenty for calling the charge a fee instead of a tax, which might have solved the problem. “This is what happens when you get cute with the truth,’’ he said.

Major tobacco companies sued soon after the law took hold.

The companies, including the makers of Marlboro and Camel brand cigarettes, say the state promised not to pursue future health-cost claims in return for the 1998 settlement money. To date, the companies have paid $2.25 billion, and another $1 billion is due to come in over the next six years.

Attorney General Mike Hatch, who defended the cigarette charge, maintained that the 1998 settlement only prohibited future court claims, not legislative action.

Fetsch strongly disagreed.

“The state is bound, like any other party, to the contracts to which it freely and knowingly enters, and from which it benefits,’’ Fetsch wrote, adding later, “The argument that any interference with the collection of the (fee) is an impairment of the legislative power is flawed. The impairment is self imposed by the settlement agreement.’’

One anti-smoking group leader said she wants the state to fight to keep the charge in place.

“We know that increasing the price of cigarettes impacts public health,’’ said Pat McKone, who directs tobacco control efforts for the American Lung Association of Minnesota. “Let’s call it a tax if it needs to be called something else, but it’s important to prevent the onset of smoking and to help people quit.’’

“The settlement was never to give a break to the tobacco industry,’’ McKone added.