More than 200,000 federal, state and local government retirees will get their money back over a period of years.
Attorney Gene Boyce said, "Those payment will be paid out in the form of tax credits until the amount of the calculated refund for each person is exhausted."
The state began taxing state and local employees on their retirement in 1989. The state supreme court ruled that the state broke its contract with retirees because it had promised tax-free pensions. Retirees contended the practice was unconstitutional.
"In my retirement I now pay taxes twice," State retiree George Jones said. "Taxed when I got it and I'm taxed again. And the court has ruled, I think very wisely, that impairment of contract should not have been the case."
Federal retirees have also been taxed and will probably be due refunds.
The US Supreme Court ruled that states must treat federal and state pensions the same.
Senator Marc Basnight said that this afternoon the decision "will take a considerable bite out of the state budget," but added that lawmakers will make every effort to comply.