SACRAMENTO -- The Schwarzenegger administration is expecting word today from the U.S. Supreme Court on a case that could add another $1 billion to the state's already-crippling deficit.

If the nation's high court, as expected, declines to hear an appeal from the state's tax board, California could end up refunding nearly $1 billion in illegally collected taxes during a year in which the deficit is already $17 billion.

The justices met Friday to consider the fate of scores of legal briefs, including the Franchise Tax Board of California v. Farmer Bros. Co. If the court declines to hear the case, it would let stand lower-court
rulings that say a portion of California's corporate tax code unconstitutionally hinders interstate commerce.

A Supreme Court clerk said Friday that the justices had agreed to hear only one of the cases put before them that day, and that the California case was not one of them. But no official announcement is expected until today.

"We're expecting (today) is going to be the day," said H.D. Palmer, a deputy director of Gov. Arnold Schwarzenegger's finance department.

The case deals with a 75-year-old provision of state tax law that gives a break on dividend earnings as long as those earnings come from a California-based company. Earnings generated outside the state are taxed at the normal rate.

Following other successful lawsuits, the Farmer Bros. Co., best known for its coffee, challenged the law, saying that it created an unfair advantage for in-state companies at the expense of businesses elsewhere. The state lost its case in Superior Court and in a federal appeals court. It sought relief from the state's high court, but the justices declined to hear it.

An appeal to the U.S. Supreme Court was the state's final chance to avoid making the massive refunds, but one that officials predicted was unlikely to succeed.

Ben Miller, counsel for the Franchise Tax Board, said chances were "exceedingly slim" that the high court would even hear the state's arguments.

Miller said California would likely have to refund $800 million in back taxes and interest. But it would also attempt to recoup as much as $150 million in taxes from other companies to strike a balance that would satisfy the lower courts.

The Legislature's chief financial adviser, Legislative Analyst Elizabeth Hill, called the case "a very real threat" to the budget. She said the lawsuit could end up costing as much as $1.5 billion this year and $180 million every year from now on, under a "worst-case scenario."

Schwarzenegger aides say Hill's estimate may be too high.

Either way, unless the Supreme Court delivers a surprise today, it's more bad news for the state's bank accounts. Hill recently announced that tax revenues were falling about $1 billion short of projections, and that even if the Legislature adopts all of Schwarzenegger's cost-cutting proposals, the state will still have a $7 billion deficit for years to come. And this all comes at a time when the governor is struggling to drum up support for his $15 billion bond measure on the March 2 ballot, which so far has not been warmly received by voters.

Palmer soft-pedaled the risk, saying it was unclear how soon the refunds would have to be paid and exactly how much they would cost. But he acknowledged that more bad news about money was the last thing the administration needs.

"An adverse ruling would definitely put more pressure on a budget that's got far too much pressure on it already," he said.