Minnesota Health Impact Fee Comes Back to Bite Pawlenty

State lawmakers frequently resort to sleight-of-hand tricks in their zeal to avoid anything that can be characterized as a "tax increase." So when Minnesota Governor Tim Pawlenty (who had taken a "no new taxes" pledge during his 2002 gubernatorial campaign) pushed through a "health impact fee" that most people correctly identified as a 75-cent cigarette tax last summer, it was a mildly amusing subterfuge, but hardly news.

No one is laughing now, however: the Minnesota Supreme Court is currently hearing a case that may force retroactive repeal of this "fee" dating back to its August 2005 implementation. The reason: to make it look more like a "fee" instead of a tax, lawmakers dedicated proceeds from the new cig tax to a special Health Impact Fund designed to help the state pay smoking-associated health care costs. But, tobacco industry representatives now point out, that's exactly what the 1998 tobacco settlement was designed to do, and Minnesota had already agreed not to pursue further claims against the industry as part of that settlement. Hence the lawsuit.

Even if the story ended there, it wouldn't be especially heartwarming--but it gets worse. The ongoing cigarette "tax" case could blow a $360 million hole in the state's two-year budget, which, in turn, could scuttle legislators' plans to provide a 10 percent property tax rebate to homeowners this year. In a tightly contested election cycle (Republicans have a two-seat majority in the House of Representatives), lawmakers are understandably concerned about the possibility that a tax rebate designed to arrive in Minnesota homeowners' mailboxes in October might not appear.

Policymakers can learn valuable lessons from this experience-- you shouldn't use clever terms to hide the impact of what you're proposing; calling a tax a "fee" tends not to fool people anyway; etc. But Governor Pawlenty seems to have learned mainly to retract his spine even further:

Brian McClung, a spokesman for Pawlenty, said after the court hearing that Pawlenty would not support replacing the fee with a tax if the court ruled against the state."If the health impact fee is ruled out of order and goes away, it would be the governor's personal choice to just let that go," McClung said.

All in all, a pretty unsavory episode in Minnesota's fiscal politics.