ST. PAUL - A cigarette "fee" that allowed Minnesota legislators and Gov. Tim Pawlenty to finish the state budget and end the state's first partial government shutdown is unconstitutional, a judge ruled Tuesday.
The ruling could leave a $400 million hole in the state's current two-year budget. It also threatens expected property tax cuts.
District Court Judge Michael Fetsch ruled that cigarette companies challenging the law were right in saying Pawlenty's "health impact fee" violated terms of a 1998 tobacco settlement agreement. Under the agreement, tobacco companies agreed to pay Minnesota billions of dollars if the state banned future fees specifically on them.
Pawlenty offered the 75-cent-per-pack cigarette fee as a way to wrap up budget talks that were stalled for weeks, saying the money would be used to help pay for health costs incurred by smokers.
The governor said he will ask that Fetsch's decision immediately be appealed to the state Supreme Court.
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He also will look into whether he can take action - without legislative approval - to change the fee so it is constitutional.
The order, handed down in Ramsey County District Court, says the cigarette charge violates the 1998 settlement because it is a fee that directs revenues to be used to recover tobacco-related health-care costs. Fetsch said if it had been called a tax, with revenues going elsewhere, the law likely would have been upheld.
Pawlenty insisted on calling the charge a fee so he wouldn't violate a pledge he signed not to raise taxes.
Tobacco companies praised Fetsch's ruling.
"We are pleased the court recognized that this law was a prohibited attempt to impose additional health-care cost related to smoking," said Denise Keane, Philip Morris USA executive vice president.
The Republican governor said the state constitution does not allow the attorney general to bind the Legislature. Then-Attorney General Hubert "Skip" Humphrey signed the tobacco company settlement; lawmakers never voted on it.
"The judge made a significant error by ignoring the principle of separation of powers, which is the Legislature's authority to independently make decisions," Pawlenty said.
"Just when we thought we had some breathing room, we don't," said Senate Majority Leader Dean Johnson, DFL-Willmar. "It came down to kind of wordsmithing on the part of the governor."
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The father of the cigarette charge said he wants to see it come back as a tax.
"Maybe what we need to do is go back and put it in the general fund," said Rep. Ray Cox, R-Northfield.
Cox hatched the tobacco tax plan in February, and Pawlenty held it in reserve until he needed it to balance the budget near the end of the session.
The cigarette charge drew opposition before it passed in July and Cox said it would be even more difficult to pass again.
Johnson said if the governor continues to refuse to call it a tax, he would have to take money out of a tax relief account and a pot of money meant to pay school districts on time.
An economic report three weeks ago shows $317 million can be spent on tax relief and more than $700 million on giving schools their state aid on time after years of delayed payments. Pawlenty and lawmakers at the time said they wanted to cut property taxes and give schools money they are owed.
"It throws a clinker into the whole thing," added another Senate fiscal leader, Sen. Keith Langseth, DFL-Glyndon.
Langseth said the state can handle the loss of revenue, if the judge's ruling stands, but it leaves no fiscal cushion.
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"Is there any money available for tax relief or not?" Langseth asked.
Some lawmakers said a special session would be needed to deal with the ruling. Not Rep. Bud Nornes, a member of the House Ways and Means Committee.
"I'm assuming we would just wait until March and take up anything we need to at that time," said Nornes, R-Fergus Falls.
Fetsch ordered the state to refund money it already has collected since Aug. 1 or give credit to the tobacco companies that sued.
The Minnesota Revenue Department reports that the charge brought in $10 million in its first month, August, and $18 million in September.
Readers can reach Forum reporter Don Davis at (651) 290-0707
