Ramsey County judge strikes down tobacco fee

Without the $401 million the fee was to raise for the state over two years, Minnesota's comfortable budget surplus could be in jeopardy.

Pat Doyle and Mark Brunswick, Star Tribune

Dealing a stunning blow to Gov. Tim Pawlenty and the Legislature, a Ramsey County judge Tuesday struck down a tobacco fee that promised to raise $401 million over the next two years for the state.

Ramsey County District Judge Michael Fetsch ruled that the fee of 75 cents per pack violated a settlement between the government and tobacco companies that barred the state from seeking additional money from the firms to pay for health care costs related to smoking.

The ruling could jeopardize the comfortable budget surplus that the state has been counting on and pose a major embarrassment to Pawlenty and legislative incumbents just in time for a critical election year.

"We are very disappointed by the court's ruling and will ask for an immediate appeal directly to the Minnesota Supreme Court," Pawlenty said in a statement. He also is considering "using existing administrative authority" to apply the fee at retail outlets.

However, one legal observer said it's possible that the judge could have the final decision in the dispute.

The fee was the linchpin to a deal between Pawlenty and DFLers that ended a stalemate over the budget that resulted in a government shutdown this summer.

The order striking down the fee sparked nearly immediate finger-pointing over who has responsibility for its failure.

Pawlenty said the judge erred by ignoring the authority of the Legislature to pass laws independent of court settlements.

But DFLers blamed Pawlenty, saying he invited a court challenge by insisting that the tobacco charge be labeled a fee to avoid the political fallout from calling it a tax.

"Because Governor Pawlenty played word games so that he could pretend to stick to his 'no tax' pledge, the state of Minnesota's budget is in peril," said DFL Party Chair Brian Melendez.

Unlike a tax that could be spent in a variety of ways, the health impact fee on tobacco was enacted to "recover for the state health costs related to or caused by tobacco use and to reduce tobacco use, particularly by youths."

Fee had several problems

Fetsch said the fee conflicts with the 1998 settlement of a lawsuit between the state and tobacco companies over health costs stemming from tobacco use. Under the settlement, tobacco companies have paid the state about $2.2 billion so far to cover health care expenses, and the state agreed to "release and forever discharge" the companies from any future claims, the judge said.

The health impact fee approved by the governor and the Legislature is essentially recovering costs from tobacco companies that the state was barred from doing under the settlement agreement, the judge said.

He also ruled that the tobacco fee violated a state Constitution prohibition against enacting a law that breaks a contract. And the judge said it also would violate the Constitution to apply the fee only to a minority of distributors who weren't party to the settlement. Cigarette buyers would merely shop from distributors covered under the agreement who need not add the fee to the cost of a pack, he said.

If the ruling stands, the state would be required to reimburse tobacco companies for money collected since the fee became effective in August. Tobacco distributors said Tuesday that figure may already exceed $100 million.

"We are pleased the court recognized that this law was a prohibited attempt to impose additional health care costs related to smoking in violation of our settlement agreement and the Constitution," said Denise Keane, Philip Morris USA executive vice president and general counsel.

Who has the final say?

Despite Pawlenty's assertion that he will appeal the decision to the state Supreme Court, one legal observer questioned whether the ruling could be overturned. Hamline University Prof. David Schultz, who teaches classes in public policy, said it appears that the settlement agreement gave the Ramsey County courts the final decision on such issues.

He said a standard clause in most contracts will either give an arbitrator or a court the final jurisdiction as a way to settle disputes over interpretation. After re-reading the settlement agreement Tuesday night, Schultz said he believes the Ramsey court decision will be regarded as final.

"My reading is that it is over," he said.

Exploring options

House Minority Leader Matt Entenza, DFL-St. Paul, said he was unclear what Pawlenty might mean in using "administrative authority" to apply the fee at the retail level. Entenza suggested that the Legislature, not the governor, would have that authority.

"That's why we have tax bills," he said.

Pawlenty spokesman Brian McClung said the governor was "exploring the possibility of having the Department of Revenue collect the [health impact fee] at the retail level rather than at the wholesale level. This may not require legislative action."

Entenza said that the court ruling resulted from Pawlenty "failing to tell the truth about taxes and fees" to Minnesota voters and that he would be seeking a meeting with the governor and other legislative leaders today to discuss options for "getting out of this mess."

He could provide few details of what those options might be, but said the state can't count on using its projected surplus. He would not indicate whether he would support a new excise tax on cigarettes.

Pawlenty said the ruling was "particularly unfortunate as recent evidence has shown that many Minnesotans are choosing to quit smoking, due in part to the health impact fee."

 

Facts about Minnesota Governor Tim Pawlenty

PawletyUnlugged