State court upholds tobacco fee

Smokers will continue to pay an extra 75 cents per pack for their cigarettes and homeowners may get a crack at substantial property tax relief, after a state Supreme Court ruling Tuesday.

The 28-page opinion, written by Chief Justice Russell Anderson, found the state's controversial "health impact fee" on tobacco to be constitutional, reversing a lower court decision in December.

The December ruling had threatened to blow a $368 million hole in the state's 2006-07 budget and imperiled competing property tax relief proposals still being debated in the Legislature.

Capitol leaders -- who have only until a Monday adjournment deadline to resolve conflicts over budget, tax and stadium bills -- were breathing long sighs of relief, if not rejoicing.

A consensus quickly emerged that securing the revenue from the tobacco fee would help grease the wheels in the process. "It gives us more room, more flexibility," House Speaker Steve Sviggum said.

Gov. Tim Pawlenty, who proposed the fee as a means of breaking last year's budget deadlock, hailed the decision both as vindication of his risk-taking leadership and as icing on a cake filled with recent good economic news.

The decision, he said, was a "victory for clear legal thinking" that will reduce smoking rates and "returns us to a stable and improving financial outlook for the state."

DFL leaders welcomed the news but not quite as joyfully. Senate Majority Leader Dean Johnson said the ruling "pulls the governor's bacon out of the fire," and added that "most Minnesotans still believe [the fee] is a tax," renewing a debate over what the charge should be called.

Representatives of the tobacco industry and distributors expressed disappointment and said they will consider an appeal to the U.S. Supreme Court.

The ruling puts into play the $317 million in a taxpayer relief account that might have been needed to cover a budget gap if the state lost.

Property tax cuts get a look

Legislative leaders were unanimous in again singling out property tax reductions, either through a Republican proposal for direct rebates or a DFL bill providing more aid to local governments, as tops on the agenda.

Sviggum said the Republicans' proposal to rebate 9 percent of this year's homeowner property tax bills is superior because it would put money "directly in the hands of taxpayers."

Senate Taxes Committee Chairman Larry Pogemiller, DFL-Minneapolis, said the DFL approach is superior because it would benefit every type of property owner, including businesses and renters, and would provide "permanent" relief.

The health impact fee, adopted during a special session last July, was imposed in August but struck down months later by a Ramsey County district judge.

At that time, Judge Michael Fetsch ruled that the fee violated the terms of the state's 1998 settlement with the tobacco industry. That agreement promised no further smoking-related health care claims against the major tobacco companies in return for ongoing payments.

The high court, however, said Tuesday that the agreement did not surrender the state's "sovereign authority" to recover costs due "to the use of tobacco products and to discourage smoking."

The ruling bolsters the state's budget, which depends on the fee revenue to stay in the black, but is tough on smokers, who will continue to feel the pinch of higher prices.

Cigar lovers and users of smokeless tobacco also will feel the bite: The impact fee doubles the charge on those products, with the specific amounts tied to the wholesale price.

The fee raises more than $3 million a week and had already piled up more than $110 million by December. All the money collected had been held in escrow by court order, and the state would have had to return it to wholesalers had it lost the appeal.

Further action?

Whether the ruling ends the legal wrangling over this issue, however, remains unclear.

Kris Eiden, deputy attorney general, said the decision was a clear-cut victory for the state. "Case closed," she said. "We believe it's the end of the road."

But David Howard, spokesman for R.J. Reynolds Tobacco Co. in Winston-Salem, N.C., said the firm may not be ready to give up the fight.

"We will consider any and all options moving forward, and an appeal to the U.S. Supreme Court would be one we will consider," he said.

Mike Ciresi, the lead attorney in the 1998 tobacco suit, said such an appeal is unlikely to succeed. "They want to take this to the United States Supreme Court? Good luck. They're nuts," he said.

Tuesday's decision solidly reinforced the Legislature's authority, noting that challenges to that authority must be proven "beyond a reasonable doubt" and that "every presumption is invoked in favor of the constitutionality of a statute."

To waive that authority because of the 1998 settlement's broad language on future claims, the court ruled, "would be to surrender the Legislature's sovereign power."

The opinion also said that because the fee is passed on to consumers, the distributors "bear no economic burden" and were not in a position to demand relief.

The ruling was unanimous, except for Justice Sam Hanson, who took no part in the case.

Justice Alan Page filed a special concurrence, in which he said that while he agreed with the opinion, he was "troubled" by the fee, which he called a "scheme" that "exacts a direct, although hidden tax on smokers to fund any manner of nonsmoking-related expenditures."

Patricia Lopez • 651-222-1288 • plopez@startribune Dane Smith • 651-292-0164 • rdsmith@startribune.com