Utahns may have to bear a painful tax increase if the ruling of a 3rd District Court judge stands.

Judge David S. Young ruled Monday that retired federal government workers who paid state income taxes on their pension checks are entitled to $137 million in tax refunds.In simple terms, that means the state of Utah owes a lot of money to about 30,000 retired workers if Young's decision survives a foray of legal appeals.

"The state gets its revenues from only one place - taxes," said state Tax Commissioner Roger Tew. "There is not a pool of $137 million parked somewhere out there that can be drawn from."

Tew emphasized it's too early to say for sure whether Utahns will pay for the tax rebates. "Ultimately the political leadership would have to assess where the money comes from," he said.

Utah's legislative leaders have already "assessed" - in several closed-door meetings during the last legislative session - where the millions will come from, according to House Speaker Craig Moody, R-Sandy.

Moody says the decision is clear: No new taxes.

"If the governor called me tomorrow and . . . asked us to raise taxes, I'd voice my opposition strongly," he said.

Moody's remedy for the judgment, if it isn't overturned on appeal, is this: Clean out the state's $63 million "rainy day" fund and take the rest - $74 million - from the painstakingly passed $105 million one-time supplement.

Bangerter could whittle the $74 million from next year's budget. But that cutting would most likely affect projects such as the Salt Palace renovation, the West Valley highway and high-tech assistance for higher education, Moody said.

"To reduce the supplemental list is painful; it's something the legislators couldn't do during the last session. It would be major surgery," he said. "But this isn't something you go and raise taxes over."

Moody added that the judgment "would be the most devastating thing I've seen happen to the state - even worse than the thrifts crisis."

Neither the rainy day fund nor the chunk taken from next year's supplemental list would be replaced, he said.

Whittling aside, Gov. Bangerter's office says it's too soon to solve the potential budget crisis.

"The day a bench decision is rendered is not the day to be designing remedies," Bud Scruggs, the governor's chief of staff, said.

He added that "no one could answer whether or not taxes will have to be raised. But it's not like we have a lot of slack in our budget."

If the $137 million judgment stands, "it will present a hardship not only to the state government but to the people of the state," Scruggs said.

Bangerter, he added, is confident an appeal of the decision to the Utah Supreme Court will be successful.

But that appeal, according to Jack C. Helgesen - who represents the federal workers in the lawsuit - will fall short.

"I think in the end, we'll still win it in appeal," he said.

Helgesen's Ogden law firm of Lyon, Helgesen, Waterfall & Jones will gain 15 percent of any dollar amount awarded by the courts. Based on Monday's ruling and minus the percentage of interest on the federal worker's claims, that's about $15 million.

Helgesen said it will be nine months to a year before retirees see their refund checks.

The class action suit was filed in June 1989 and arose over a State Tax Commission policy that allowed state income tax exemptions for state and local retirees but not for federal retirees. That policy - practiced by a number of other states - was declared unconstitutional by the U.S. Supreme Court in a Michigan case.

Several court decisions in about 20 states since the Supreme Court ruling have gone in favor of federal retirees.

In Missouri, state courts struck down a discriminatory refund policy and ordered refunds paid in full. Missourians covered the refunds by paying extra taxes.

"It's a simple matter of fairness," said Chauncey O. Rowe, a retired federal employee. "We've done as much for the state as state retirees have. We're good Utahns; darn good."

Rowe said since Utah collected the money "unconstitutionally," officials should refund the taxes in full.

"We don't think the state owes us anything except equal and decent treatment," he said.

Claims in the class action suit are based on a 1939 federal statute that prohibits states from taxing federal retirement income while allowing their own workers to be exempt from paying state retirement income taxes.