WASHINGTON -- The Virginia legislature approved a $340 million package Friday designed to settle a long-running dispute with federal retirees whose benefits were illegally taxed in the late 1980s.

The House of Delegates approved the settlement unanimously and the Senate approved it on a 35-to-2 vote. Virginia Gov. George Allen is expected to sign the measure.

The package, which major groups representing the retirees said they found aceptable, covers about 80% of claims for refunds by about 185,000 federal retirees.

Passage of the legislation, which came after the House and Senate finally agreed to put the state tax department in charge of administering the payments, is expected to end five years of litigation by the retirees.

The bill allows for the $340 million to be paid out over five years. The retirees would get back at least 75% and possibly all of their overpayment, depending on how many apply for refunds. The state will not pay back lost interest.

Virginia taxed federal retirees' income in the 1980s, while exempting city and state employees. In 1989, the Supreme Court ruled that such taxes are illegal if state and local retirees' income is not similarly taxed.

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