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The state's 75-cent-per-pack increase in the cigarette tax is being challenged in court by tobacco companies. (Photo by Sean Gallup/Getty Images)

Attorneys for several tobacco companies say the state of Minnesota reneged on its tobacco settlement agreement when it increase the tax on tobacco by 75 cents a pack last July. The companies told a Ramsey County judge the increase violates the state's agreement not to seek further claims against the tobacco industry.

St. Paul, Minn. — The tobacco tax hike helped balance the state budget and is expected to raise $400 million for the state's budget over the next two years.

The tobacco companies say the state is trying to double-dip. They argue that when they settled with the state of Minnesota and Blue Cross in 1998, they made a deal. The tobacco companies would pay billions of dollars, in return for the state settling past claims -- and releasing them from any future claims related to smoking-related health care costs.

The tobacco companies now say that the Legislature's tax hike, known as the health impact fee, is yet another claim against them. R.J. Reynolds attorney Steven Patton says the contract between the state and the tobacco companies was clear -- the state would release the tobacco companies from claims and any liabilities.

"This was a landmark settlement. The industry's going to pay billions, but it's going to achieve permanent peace in terms of further claims that the state attributes to the product," says Patton.

The Legislature passed the cigarette tax hike against a backdrop of budget chaos. State government had shut down because legislators were at a stalemate. They could not balance the budget despite working past the deadline into extra a special session.

Arguing for the state, Assistant Attorney General Brad Delapena told the court that the state is living up to its end of the bargain. He said that when the state agreed to settle all claims and liabilities, it meant legal claims, such as lawsuits. Delapena said the state would have never surrendered its ability to tax the cigarette companies.

"Had these sophisticated parties intended to make these manufacturers exempt from future taxes, that's what they would have said because it's easy to say. They would not have used the term 'claims,'" argued Delapena.

When he proposed the move, Gov. Tim Pawlenty called the tax hike a fee. Some legislators, however, said the fee was in fact a tax, and that the governor only called it a fee to maintain his pledge not to raise taxes.

But Patton said the fee label really makes no difference in the case. What does is that the tobacco companies and the increase in tobacco taxes are both supposed to pay for the same thing -- smoking-related health care costs.

"Whether it's a fee or a tax, the stated purpose in the statute was to reimburse the state for costs that the tobacco industry has already reimbursed them for," Patton says.

The state of Minnesota's Delapena also said he didn't think the label was important to the case.

"The Legislature has the authority to impose either a tax or a fee in this case. We've encouraged the judge not to reach that issue because it doesn't matter," Delapena says.

Gov. Pawlenty's attorney Karen Janisch told the court that the state is not double-dipping, as the tobacco companies contend.

She said whatever money the tobacco companies are paying, they simply pass along the increase to customers. In addition, she said that if the court allows the tobacco companies to win, it will dangerously expand the attorney general's power.

Judge Michael Fetsch allowed some tobacco distributors and smaller tobacco companies to intervene in the case. The judge told parties to submit final court papers to him by Oct. 28.