Tobacco fee faces day in court

09/29/2005

Patricia Lopez and Dane Smith,
Star Tribune
September 29, 2005

The first hearing in a high-stakes lawsuit that could blow a $401-million hole in the state’s budget and eliminate the recently enacted 75-cents-a-pack fee on cigarettes takes the stage today in a St. Paul courtroom.

The suit filed last month by four major tobacco companies alleges that the so-called “health-impact fee” on all tobacco products, in effect since Aug. 1, violates a guarantee in the industry’s $6.1 billion lawsuit settlement with the state in 1998.

Ramsey County District Judge Michael Fetsch will face a bevy of lawyers today as the high-stakes legal conflict opens. If the companies win, Gov. Tim Pawlenty and the Legislature would have to find a way to backfill $401 million in expected collections from the tobacco charge by enacting program cuts or other revenue raisers.

“We’re pretty comfortable with our case,” Attorney General Mike Hatch, who is defending the state’s position, said in an interview this week. While the 1998 settlement prohibited the state from filing future claims against the major tobacco firms, it did not bar legislative action, Hatch said, and was never intended to limit its ability to impose taxes or fees.

“That’s something the state would never give away as part of a lawsuit,” Hatch said. “This is not a claim the state has made against the tobacco industry. A claim is a lawsuit. This is a law, passed by the Legislature.”

Fee or tax?

Hatch contends that the tobacco companies’ case hinges on a slender rhetorical reed—that the health impact fee is not a tax. Since the national settlement with tobacco companies, 38 states have raised their tobacco taxes without legal challenge.

But because of Pawlenty’s no-tax-increase pledge, Minnesota resorted to a different tactic to resolve its budget crisis. At the governor’s behest, the Legislature passed the new fee to raise funds ostensibly for health care, although the bulk of the money actually went to schools.

And that is where tobacco companies think they have spotted a fatal flaw. Minnesota, which settled its own case against the tobacco companies and was not part of the national settlement, agreed in 1998 that it would not impose any additional “liabilities of any nature whatsoever ... whether legal, equitable or statutory ... for reimbursement for health care costs allegedly associated with use of or exposure to tobacco products.”

Off to the side are the “non-settling” tobacco companies—smaller firms that were not a part of the 1998 deal—that have asked to intervene in today’s case, oddly enough, on the state’s side. The settling companies oppose the intervention and that will be one of the issues Fetsch will have to consider first.

The smaller companies fear that if Big Tobacco wins, their lesser-known products will be the only ones carrying the 75-cent-per-pack fee that has already driven some Minnesotans to border states to buy their smokes.

“That would create a substantial price advantage for the major manufacturers,” said Brad Delapena, manager of Hatch’s tax litigation division.

Delapena said the case against the state “boils down to semantics. They [tobacco companies] know this is really a tax. It was called a fee for political purposes and they’re going to make some hay out of it.”

In reality, he said, “it doesn’t matter whether it’s called a fee or a tax. The attorney general cannot—and did not—barter away the Legislature’s authority to impose exactions on cigarettes.” What the state did waive, he said, was the right to any future judicial claims.

A spokesman for the companies, David Howard, a communications representative for R.J. Reynolds Tobacco Co., responded with a statement that his company released at the time of the filing of the suit.

The companies “agreed to make substantial payments to the state to resolve all past, present and future liability relating to state health care expenditures allegedly attributed to tobacco use,” the statement said. “The newly enacted HIF expressly states that its purpose is “to recover for the state health care costs related to or caused by tobacco use.”

“The state is clearly trying to get paid twice,” the statement said.

Pawlenty’s view

In a legal brief filed last week, Pawlenty argued that even if former Attorney General Hubert Humphrey III did agree to waive the state’s lawmaking power in the settlement, he overstepped his authority.

Minneapolis attorney Mike Ciresi, who negotiated the 1998 settlement, called the major tobacco manufacturers’ arguments “disingenuous” and “total nonsense.” The case would never have been brought, he said, “except for the folly of politicians who are unable to call something what it is: a tax.”

Had the Legislature done so, he said, “they [tobacco companies] would never have been able to make even this phony claim.” Even so, Ciresi—who is not involved in the current dispute—said he is confident the state will prevail.

“You can call it a tax, you can call it a fee, you can call it a chocolate malt,” he said. “It doesn’t matter. The court cannot abrogate the state’s authority to tax and they [tobacco companies] know it.”

A ruling against the state might lead to a special session of the Legislature to transform the fee into an actual tax that could stand up in court, or to find other ways to plug the hole in the state’s two-year, $30 billion general fund budget.