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Minnesota Supreme Court upholds tobacco fee

ST. PAUL -- No sooner had the Minnesota Supreme Court ruled the state's new 75-cent-a-pack cigarette fee legal on Tuesday than lawmakers began arguing anew about what to do with it.

Tax relief was the No. 1 suggestion for how to spend the up to $400 million the court ruling made available. But how to get there was the big debate in a legislative session that must wrap up by Monday.

Tobacco companies and distributors sued the state, claiming the "Health Impact Fee" violated a 1998 settlement that so far has provided the state $2.2 billion to offset smoking-related health costs, with payments to continue indefinitely.

The companies said the settlement forbids the state from imposing further penalties on them. Although a lower court agreed, the high court dismissed the arguments.

"We construe the settlement agreement not to bar enforcement of the Health Impact Fee," Chief Justice Russell Anderson wrote for the court in a ruling released Tuesday afternoon.

Tobacco companies would not comment other than to say they are considering what options they have.

State policymakers certainly did comment.

Gov. Tim Pawlenty said he reluctantly proposed the cigarette fee a year ago to get legislators out of a financial stalemate.

"The Health Impact Fee was an imperfect solution in a very ugly situation," the governor said Tuesday.

"This offers up a lot of options for tax relief," Pawlenty added.

One of those options is to mail property tax rebate checks to homeowners, as proposed by House Tax Chairman Phil Krinkie, R-Lino Lakes.

Senate Democrats stuck to their proposal to increase aid to cities, schools and counties in hopes that would hold down property tax increases. Democrats took the opportunity to blame Pawlenty for $2 billion worth of property tax increases during his term in office. House Minority Leader Matt Entenza, DFL-St. Paul, said rural Minnesota property taxes have soared 13.1 percent.

Even though they blamed Pawlenty for tax increases, even Democrats said the ruling was good news.

"A cloud of uncertainty has been lifted," Entenza said.

The chief deputy attorney general and Pawlenty said they do not see the ruling being appealed.

"We believe this is the end of the road," said Kris Eiden, the chief deputy.

She also said it appears $166 million already collected is available for legislative spending.

Much of the argument in the year since Pawlenty proposed the cigarette charge has been whether it is a tax or a fee. The Supreme Court said it didn't matter.

The fee is expected to bring in about $200 million a year. Anderson wrote that the fee is being paid by smokers, not the tobacco companies, so the companies were not penalized.

While Justice Alan Page agreed that the fee is constitutional, he wrote that the way the fee is instituted bothers him.

"This scheme exacts a direct, although hidden, tax on smokers to fund any manner of nonsmoking-related state expenditures," Page wrote. "This hidden tax is neither imposed on nor borne by any other Minnesota taxpayers. Thus, I find this scheme troubling."

Rep. Dean Simpson, R-New York Mills, said in many ways the ruling makes life easier for legislators who don't have to fill a hole in the state budget.

However, with just days left in the session, Simpson said that legislative leaders and Pawlenty need to decide how to use the money, and not leave it up to a House-Senate conference committee. Simpson said rebate checks are one option. He said property tax relief is his top priority.

Rep. Mike Charron, R-Woodbury, said he likes the idea "of sending it back to the people."

Lawmakers did not agree about whether having money available will make it easier or harder to end the legislative session.

"Life was simpler without the money," Charron said.

Senate Majority Leader Dean Johnson, DFL-Willmar, said senators all along figured the money would be available, so Tuesday's ruling didn't affect them.

"The Supreme Court ruling pulls the governor's bacon out of the fire," Johnson said.

Instead of one-time rebates, Johnson and Senate Tax Chairman Larry Pogemiller, DFL-Minneapolis, said they prefer permanent tax relief.

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.