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Tax collectors: Cigars, other tobacco may not escape fee

Get ready for some bad news, cigar smokers. Your pleasure might not escape Minnesota's health impact fee, even if it's struck down by a court.

That could go for other non-cigarette tobacco products, too.

The tobacco fee was slated to raise more than $400 million over two years. But new figures Tuesday from the state Revenue Department peg the lost revenue at only $368 million if the fee is invalidated.

Tobacco companies argue that the fee violates a 1998 tobacco lawsuit settlement. A Ramsey County judge agreed; the question is now before the state Supreme Court.

"We're assuming for now that it would apply only to cigarettes," George Hoyum, director of the Department of Revenue's special taxes division, said of any possible reversal.

Tax collectors are still counting on about $30 million from the surcharge on cigar, pipe, chewing, moist and other tobacco to roll in over the two-year budget period that ends in mid-2007, Hoyum said.

If the 75-cent fee isn't levied on cigarettes, they also expect a hefty increase in cigarette sales - and hence higher tax collections.

Cigarette companies sued to overturn the fee, saying their $6.1 billion settlement with the state gave them immunity from coughing up more money to cover health costs - exactly what the health impact fee targeted.

The Supreme Court will hear arguments for and against the health impact fee in April.

A spokeswoman for Attorney General Mike Hatch, who's appealing the case for the state, declined to comment on the Revenue Department's projections.

Lawmakers enacted the cigarette charge last year as part of a session-ending budget compromise backed by Gov. Tim Pawlenty. The law also doubled fees for cigars and other tobacco products, from 35 percent of the wholesale price to 70 percent.

The prospect that the health impact fee might continue on cigars but not cigarettes didn't sit well with Eileen Bream, who owns Stogie's on Grand in St. Paul.

"Why in the world would they leave the other? It would be so unfair," Bream said. "You would have a lot of outraged people if it went away for cigarettes but not other tobacco."

Bream said the fee has forced her to raise retail prices and has made it more expensive to keep products in stock, since the fee is due soon after the store buys cigars.

She said she's heard customers grumbling about lawmakers and their decisions, and expects that ire to play out in November's major state election. But she said small shops like hers can't afford to mount a legal challenge to the fee as the big tobacco companies have.

Through the end of December, the state collected a total of $97.5 million from the health impact fee - $7.88 million of that from tobacco products other than cigarettes, Hoyum said. While the fee's legal status is tied up in court, the state is required to hold the money in a separate account without spending it.

Source: Duluth News Tribune