This is a rush transcript from "On the Record," March 29, 2010. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: Well, it's almost a civil war in Michigan over, what else, health care, the Michigan attorney general joining a lawsuit against the federal government. But Michigan Governor Jennifer Granholm says, "Not so fast." And now the attorney general is in a battle with himself since he is also the governor's lawyer.

Earlier, Michigan Governor Jennifer Granholm went "On the Record."

(BEGIN VIDEOTAPE)

VAN SUSTEREN: So, governor, I understand you have a little disagreement with your state attorney general who has joined this lawsuit that is filed in the state of Florida challenging the health care bill on constitutional grounds. What is going on?

GOV. JENNIFER GRANHOLM, D - MICH.: Well two problems, Greta. One is that as the state attorney general he represents the state of Michigan as an entity, and I'm his main client. His main client has been one of the governors who has been a co-chair of the governor's task force trying to get in bill through because it helps Michigan.

So he wears two hats. He can file on behalf of himself as the attorney general or on behalf of some other entity or the people. But he cannot file on behalf of the state of Michigan. He does not represent me.

So I've asked him instead, as my lawyer, to file in that very case on the other side, or at least to file an amicus on the other side. I am not an -- I will not allow him to speak for the state government when the state government has been seeking to get this reform passed, because it helps the state of Michigan.

VAN SUSTEREN: Before I get to the question of the intrigue of having them both sue for the state and have to represent you in fighting that suit he has filed, let me ask you this -- in Wisconsin for instance, I've learned the other night, is that the attorney general cannot file a lawsuit without specific permission on behalf of the governor or the legislature. Do have you that specific requirement in your state?

GRANHOLM: Yes. If he's representing the state of Michigan, that means he's representing the executive branch, the agency, the governor. He cannot file against my wishes on the side that he has filed. He can file as the attorney general. He can file on behalf of the people. But he cannot file on behalf of the state government and the state of Michigan because he's my client.

VAN SUSTEREN: So he could legitimately go forward and say I don't represent the state of Michigan, that's the governor, but I represent the people and I'm going forward. He could proceed that way?

GRANHOLM: He would proceed that way. He has the constitutional authority to do that. But as my lawyer, he cannot represent me or the state government.

And he would have to -- I'm asking him to file on the other side to intervene on the other side so that my wishes as governor and the state agencies are represented in that suit. That's the first problem, Greta.

Watch Greta's interview with Gov. Granholm

And I mentioned there are two problems. The second problem of course is that the claims just don't have merit in terms of the commerce clause and Congress' ability to regulate. So I haven't found a single constitutional scholar who thinks that this has actual merit. So I think on both substance and process, he's got a problem.

VAN SUSTEREN: Let me go back to the other one. What would typically happen, if he weren't your lawyer, because you're the governor, you would get another lawyer and that lawyer would send a letter saying don't do it.

But because of the peculiar nature and relationship between the attorney general and the governor in Michigan, he in essence has to go write himself a letter saying don't represent the state, right?

GRANHOLM: Sort of. He has to set up a conflict wall inside the office and have a lawyer or a couple of lawyers representing the state government, the state of Michigan.

I was the attorney general of Michigan too, and I had conflicts, often political conflicts with my predecessor, who was a Republican and I'm a Democrat. So I understand this happens. But what you can't do is go in against your client's wishes and purport to represent that client, and that's what he has done.

VAN SUSTEREN: Have you talked to him about this? Did you get any notice he was going to do this?

GRANHOLM: No notice whatsoever. No notice whatsoever.

VAN SUSTEREN: The first time you --

GRANHOLM: The first time I heard about it --

(CROSSTALK)

VAN SUSTEREN: Just to understand him, he is someone who has previously been aggressive towards Blue Cross Blue Shield in the state of Michigan, is that right?

GRANHOLM: Yes. He's had his causes. And he's also running for governor as a Republican.

VAN SUSTEREN: That was going to be my next question.

GRANHOLM: So this is obviously a feather in his political cap or at least in his calculation.

However, I can just tell you, Greta, like I'm sure this battle will play out in states across the country from a political perspective, but there will be a lot of people in Michigan who are benefited by this and who won't like it. For example, the kids who are almost 27-years-old and who may have their health insurance taken away if this were successful who aren't going to like him intervening on their behalf.

He is certainly not representing them or any of the others who will be benefiting.

VAN SUSTEREN: So there are a number of issues here. First, whether someone running for governor in a close -- I looked at the numbers, and he's very close to the other two in the Republican primary, no doubt wants to achieve the nomination from his party to run for governor.

You've got the problem where has to represent the governor against himself. And you've got the problem where this lawsuit is filed in Florida, which you said doesn't have any merit, but that turns on the issue of how the commerce clause essentially is interpreted, and neither you nor I know at this point whether it will be broadly interpreted to mean that the statute will be constitutional, or narrowly interpreted in which case the health care bill would be unconstitutional.

Is that a fair summary of this?

GRANHOLM: I think it is fair. I'm assuming there was some decision made about which forum to file in. So my guess is they picked a forum friendly to a narrow reading of the commerce clause.

However, I can just say the review of the jurisprudence says they would have to be doing jurisprudential back flips, a jurisprudential revolution to go in the direction they are suggesting.

Even Scalia has written that a narrow effect of medical marijuana, even for personal use, as long as somebody's handing it out affects commerce. And clearly this affects commerce when you are requiring somebody to purchase insurance.

VAN SUSTEREN: Everyone has had eyes on your state in particular because you've had term unemployment, you, Nevada, and Rhode island unfortunately have been the leaders on this unemployment rate.

You have suggested putting a sales tax on services, lowering the state tax from six percent to five and a half percent, but to include services, which would mean going to the manicure, getting car fixed, getting a lawyer or anything else. I assume that is not particularly attractive right now to the people in Michigan?

GRANHOLM: It is a whole restructuring. I've also suggested that we would give businesses a $1 billion dollar tax cut. So it would be restructuring the taxes to give businesses $1 billion tax break, to lower the sales tax rate to five and a half percent, which would make us the 45th lowest in the country because we don't have local sales taxes, and to spread it to services.

And right now we tax very few services in Michigan, and yet, consumers spend 66 percent of their disposal income on services. Services skew a little more higher end, so it adds a lay of progressivity to the tax structure.

But overall that restructuring ends up being revenue gnaw the end of the third year. But what we are doing because our schools are funded by the sales tax is we are putting all of that money to prevent massive cuts to our public educating system at a time when we are trying reshape our economy and create a knowledge economy instead of only a manufacturing economy. We love manufacturing, but we want to add new sectors.

(END VIDEOTAPE)

VAN SUSTEREN: We invited Michigan Attorney General Mike Cox to go "On the Record." We hope he will this week.

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