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Minnesota not giving up on cigarette fee

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AbdelRahman, who works at the Phoenix Food and Tobacco store in downtown St. Paul, says he's a smoker who wants to quit. He says he and many other customers were unhappy when the increase was enacted. (MPR Photo/Tom Scheck)
Attorneys for the state of Minnesota say they'll appeal a legal decision that declares the state's new tobacco surcharge invalid. A Ramsey County District Court judge ruled on Tuesday that the fee is unconstitutional because it violates a 1998 state settlement of its lawsuit against tobacco companies. The decision has left a $400 million hole in the state's budget.

St. Paul, Minn. — One day after a Ramsey County District Court judge threw out the 75-cent-a-pack surcharge, lawmakers were still a bit stunned by the ruling. When the "health impact fee" first passed last summer, the legal issue never came up.

Gov. Tim Pawlenty and others also ridiculed the lawsuit when it was first filed, saying a "first year law school student could beat it." Now everyone is taking the lawsuit more seriously.

"We were quite surprised by this judge's decision," Pawlenty acknowledged on Wednesday.

During a news conference Pawlenty said the ruling is troubling because agreements like the one reached seven years ago with tobacco companies shouldn't tie the hands of lawmakers to do business in the future. In terms of the budget gap, Pawlenty says he's not too concerned because it's only a fraction of the state's $31 billion budget.

If the appeal fails, Pawlenty suggested lawmakers could find another way to fill the budget hole or use a portion of the state's budget surplus to make up the difference.

"We have the money in the bank to address this matter. We have extra money, so to speak, in the tax relief account," according to Pawlenty.

The state has been collecting the fee from wholesalers since August. Pawlenty said his office may consider imposing it at the retail level, which they believe would circumvent any legal challenges.

Several lawmakers say the governor doesn't have authority to make such a change. Pawlenty also seemed to lean against the idea of adding the 75-cent-a-pack fee to the state's current tobacco tax. He said the state's economy is improving and they may not need the money.

Rep. Ray Vandeveer, R-Forest Lake, agrees. He says they shouldn't appeal the decision and abandon the fee altogether.

"We didn't need the tax in the first place, and so I don't think I would be too sad to see it just go away," he said.

But that doesn't sit well with some lawmakers. The fee was a critical to a budget solution that ended two special sessions and a partial government shutdown. Much was made at the time of whether the charge was a fee or a tax. Pawlenty, who had pledged not to raise taxes, insisted on calling it a fee. And the judge seemed to rely at least in part on that distinction when declaring it invalid.

Sen. Sheila Kiscaden says an increase in tobacco prices reduces smoking rates and costs from smoking-related illnesses. The Independence Party member from Rochester says she doesn't care if it's called a fee or a tax.

"What matters is that we raise the cost of cigarettes, because it has a very positive impact on health, health outcomes, chronic disease," she said.

The ruling has also prompted some confusion in the state Capitol. Some suggested that the judge's ruling could not be appealed because the tobacco settlement gives Ramsey County District Court the final decision on legal issues involving the agreement. Both Pawlenty and Attorney General Mike Hatch disagree and say they have the right to appeal.

There's also the issue of whether the state should continue collecting the tobacco surcharge. The Minnesota Department of Revenue says it will continue to collect until it receives a notice from the judge. But Kris Eiden, with the Minnesota Attorney General's office, says that notice is the judge's order itself.

"The order indicates that this fee cannot be enforced and I read that as meaning it can't be enforced... as of today," she said.

Eiden says her office asked the judge to allow the state to continue collecting the money until all of the appeals are exhausted. If all of the appeals fail, the state is required to give back the $65 million it collected since August first.

A hearing has been scheduled on the state's request for January 18th.

Some smokers are greeting the legal decision with delight. AbdelRahman, who works at the Phoenix Food and Tobacco store in downtown St. Paul, says he's a smoker who wants to quit. He says he and many other customers were unhappy when the increase was enacted.

"Customers didn't like the increase to start with, they were really mad," he said. "A lot of customers had to shift and change the brand of their cigarettes from name brands to generic brands."

It isn't clear if the smokers who paid the fees through higher prices will ever see a return if the judge's order stands. The order says the tobacco companies and distributors who filed the lawsuit should receive rebates or credits for the money they already paid.

Pawlenty disagreed with the order and said the smokers, not the tobacco companies, should receive the rebates.