Tobacco industry contests state fee

08/27/2005

Pam Louwagie and Rochelle Olson,
Star Tribune
August 27, 2005

Big tobacco companies and several Minnesota distributors are taking their dislike of the state’s new 75-cent-per-pack cigarette “health impact fee” to court, saying it violates the multibillion dollar settlement reached with the state seven years ago.

In the 1998 settlement, the state agreed not to seek more money for health care costs associated with tobacco, the companies claim in a motion filed Friday in Ramsey County District Court. The fee, which was key to balancing the state budget after a partial government shutdown, earmarks money for such costs, they said.

A spokesman for Gov. Tim Pawlenty said that state officials hadn’t seen the court papers but that they don’t believe the fee is prohibited by the settlement.

Besides more money being collected for tobacco-related health costs, a central point in the case may be the controversial decision to enact the levy as a fee instead of a tax.

The settlement doesn’t prevent further taxes on cigarettes, legal observers and Attorney General Mike Hatch said.

Pawlenty had offered the fee as a compromise to break the budget logjam but insisted that it officially be called a fee.

The governor, who signed a pledge during his 2002 campaign not to raise taxes, called it a “user fee” when he announced it in May. “Some will say it’s a tax,” he said at the time. “I’m going to say it’s a compromise.”

Debate raged over whether the fee is really a tax, with Pawlenty’s fellow Republicans calling it a tax in disguise.

The fee was expected to raise $401 million over two years from the 75-cent-per-pack charge on cigarettes at the wholesale level and the doubling of the excise tax on other tobacco products.

Next move?

The court challenge could result in lawmakers going back to change the language to call the fee a tax and getting rid of provisions to earmark part of the revenue for health care costs related to tobacco.

David Schultz, a law and political science professor at Hamline University in St. Paul, said “bad governoring and bad legislating” led to the problem, because state leaders should have thought about the possibility of such claims while debating the fee.

Hatch, a DFLer and a potential 2006 gubernatorial rival of Pawlenty’s, said the state’s defense would be that the fee really is a tax.

Plenty of jurisdictions, including New York City, that are also covered by consumer fraud settlements with the industry already have increased taxes on cigarettes, he said.

“The industry acknowledges that if this is a tax, they have to pay,” Hatch said.

He added the state will also argue that regardless of whether it is a fee or a tax, it’s not covered by the 1998 settlement and it’s legal.

“This is a case of a political gimmick screwing up the stability of the state budget,” Hatch said, repeatedly blaming Pawlenty for political “gamesmanship.”

Hatch downplayed the notion that the legal challenge could blow a hole in the state budget, saying the Legislature and the governor would find a way out of it—possibly by raising taxes.

Dan McElroy, Pawlenty’s chief of staff, said the attorney general “could have offered that legal advice at any time when the fee was being discussed and debated by the Legislature and he did not.” McElroy also questioned whether Hatch would mount a vigorous defense.

McElroy said that lawyers at the state Department of Revenue had looked at the fee and that the administration is looking forward to seeing the legal documents to offer better comment later.

The stakes

The fee, which took effect Aug. 1, was part of the linchpin $9 billion health and human Services bill. It helped to balance the new $30.3 billion two-year budget that passed after six months of partisan impasse and a historic eight-day partial government shutdown.

The motion filed Friday—by Philip Morris USA, R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and nine distributors—argues that the 1998 settlement released manufacturers and their distributors from all past, present and future liability related to health care expenditures attributable to tobacco and that the fee violates the settlement contract. The settlement has the tobacco industry paying more than $6 billion to the state to recoup health care costs of treating ailing smokers.

Pawlenty spokesman Brian McClung said if that were a legitimate issue, tobacco companies should have brought it up as the fee was being debated in the Legislature.

Philip Morris USA spokesman Bill Phelps said the company opposed the fee through lobbying.

Hamline’s Schultz said the state could have had a better argument if consumers were paying the money, instead of the costs being imposed on distributors.

A Minneapolis attorney representing the nine distributors, Randy Gullickson, said the fee is hurting his clients.

“This has a significant adverse impact” on their bottom line and in competing with surrounding states, Gullickson said. “These for the most part are family-owned businesses.”

Blue Cross and Blue Shield of Minnesota said it has consistently advocated for a cigarette tax increase, even after it ended its lawsuit against the tobacco industry in a settlement that was separate from the state’s.

“We have supported the tax, and we still support it,” Blue Cross spokeswoman Jan Hennings said. The Eagan-based insurer has lobbied for the tax because it will prevent children from taking up smoking and cause more adults to give up the habit, she said.

Senate Minority Leader Dick Day, R-Owatonna, said that although he’s not a lawyer, he doesn’t think the tobacco companies have a case.

“I didn’t think that we could never raise prices on cigarettes just because we settled the lawsuit,” he said. “That just sounds kind of unrealistic.”

Former Attorney General Hubert Humphrey III said that he hadn’t seen the motion but that he wasn’t surprised that tobacco companies were back in court on the issue.

“This is the kind of thing you just have to anticipate. This industry continues to be very aggressive. It’s willing to spend the money to try ... to prohibit the positive things that are happening with people moving away from using tobacco.”

Hamline law Prof. Joseph Daly said the fee-vs.-tax wording gives leeway for the cigarette companies to “play these games because the Legislature itself was playing games.”

Said Daly: “It’s the state of Minnesota with its Orwellian newspeak getting itself into a dilemma.”