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(Getty Images/Tim Boyle)

The 75-cents-a-pack cigarette tax approved by the Legislature last summer has been struck down. A Ramsey County judge says the tax flies in the face of a settlement reached with tobacco companies in 1998. That agreement exacted billions of dollars from the tobacco industry to cover costs incurred upon government health programs because of smoking. The settlement also banned the state from making future claims on tobacco companies. Legislators approved the cigarette tax over the summer to help solve the state's budget crisis, estimating it would generate $400 million over the next two years. Lawmakers are now speculating on what the loss of that revenue cushion could do to the state's current budget surplus.

St. Paul, Minn. — Gov. Tim Pawlenty's office promptly expressed disappointment with the ruling that strikes down the cigarette charge.

Pawlenty's office says the Minnesota Legislature had the right to levy the fee, because the separation of powers permits it to make decisions independent of other branches of government.

But Steve Patton, an attorney for R.J. Reynolds, says the ruling proves that a deal's a deal. He says the state's settlement with tobacco companies in 1998 released them from future claims.

"This ruling affirms that agreement, enforces it according to its plain terms, and makes a very clear statement that everybody who enters into a contract, whether you're a tobacco company or the state of Minnesota, you have to live up to your bargain," Patton said.

The Minnesota attorney general's office, which defended the fee in court, says it's still examining the ruling and wouldn't comment on it at this point.

The fee was Gov. Pawlenty's idea. His spokesman, Brian McClung, says the governor's office will appeal the ruling, bypassing the appeals court to take the case directly to the Minnesota Supreme Court.

McClung says there might be ways to levy the 75-cents health impact fee on retailers, who don't fall under the terms of the state's past settlement with the tobacco industry.

"The tobacco settlement spoke to tobacco companies and distributors; it was not a settlement related to retailers. So we're going to look into applying the health impact fee at the retail level, and see if simply by making that administrative move, we might be able to satisfy what the judge was looking at here today," he said.

The ruling on the cigarette tax comes after a revenue forecast showed the state with a $700 million projected surplus. The cigarette tax represents $400 million in revenue over the next two years. McClung says the loss of that sum won't significantly crimp the state's current budget surplus.

Other Republicans agree, like Jim Knoblach, chair of the Minnesota House Ways and Means Committee.

"Clearly the fact the state is in a lot better budget shape than it was before is good. There will be a February forecast that comes out in February and I actually think there will be some additional money showing (in the February forecast) that will be available to deal with this as well," according to Knoblach.

But Democrats don't buy that assessment. And that brings the issue around to the seemingly intractable difference between the two parties in their view of the state's fiscal health. Democrats have been arguing that the the so-called good news of the surplus masks cuts made to education and health care during the state's leaner years.

As it stands now, most of the surplus will repay school districts for funds borrowed during the budget crisis.

Loren Solberg, the leading DFLer on the House Ways and Means Committee, worries about paying the schools back, given the current ruling that would cut revenue from the cigarette tax.

"I think there's universal support on a bipartisan basis to try to make sure the schools get their money on time. So if the decision is upheld I think we have a fiscal problem in the state of Minnesota again," Solberg said.

The judge's ruling calls for the state to pay tobacco companies for fees paid since the cigarette tax took effect in August.