A Superior Court judge has ordered the state to refund millions of dollars in taxes on benefits to 80,000 state and local government retirees.

Judge I. Beverly Lake Jr. also barred the state from taxing the retirees' benefits in the future.Lake ruled that the taxes violated a state prohibition against retroactive taxation. The ruling came in response to a lawsuit filed in February by 17 government retirees.

Attorneys for the 17 asked that the suit be certified as a class-action suit, so that any ruling in the case would affect an estimated 80,000 retirees in the same situation.

G. Eugene Boyce, a Raleigh attorney representing the retirees, said he expects the state to appeal the case to either the N.C. Court of Appeals or to the state Supreme Court.

But George W. Boylan, the assistant state attorney general who represented the state, said that no decision on an appeal had been made yet.

Boylan said he did not know exactly how much money would have to be refunded because of Lake's order, but said ``it's in the millions of dollars.'

The suit, which is one of three related lawsuits filed in state and federal courts, claimed that the General Assembly wrongly repealed an income-tax exemption on such benefits in August 1989. That decision was made effective retroactive to Jan. 1, 1989.

The General Assembly changed the law after the U.S. Supreme Court ruled in a Michigan tax case that states could not discriminate between federal retirees and state retirees in deciding whether to tax benefits.

North Carolina had only limited tax exemptions on federal benefits, so the state had two options: increase the exemptions on federal benefits, or lower those on state benefits. The General Assembly cut the state employees' exemptions.

It was that decision that Lake ruled Friday was unconstitutional. Lake's order, if it is not overturned, will mean that the state will have to lower to equal levels the benefits tax on all federal, state and local government retirees.

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