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California Senate OKs budget, tax bill fails

SAN FRANCISCO (Reuters) - California's state Senate approved on Friday a budget plan that would close the state's nearly $10 billion deficit but failed to pass a tax bill to help fund it.

The votes mark the first substantive effort in weeks by lawmakers to take up and fund a state budget ahead of the June 15 deadline for approving a spending plan for the fiscal year beginning July 1.

If they do not meet the deadline, California's controller has said he would withhold their pay under terms of a law approved by voters last year in response to the long history of the state leaders ignoring budget deadlines.

California's spending plans have been signed into law before the start of new fiscal years only five times over the past two decades.

Wall Street would also like to see a budget for California, the biggest issuer of U.S. municipal debt last year, in time for its new fiscal year so the state's government avoids another cash crisis.

Running low on cash in 2009 during a budget impasse, California resorted to issuing IOUs promising payment to vendors and tax refunds.

The finances of the most populous U.S. state's government have been in a roil in recent years, the result of relying too much on revenue from volatile personal income taxes, the long housing slump, tightfisted consumers and a double-digit unemployment rate.

Investors in the $2.9 trillion muni debt market and rating agencies also want a spending plan free of accounting gimmicks and one-time measures routinely employed by California's leaders over the years to help balance the state's books.

Moody's Investors Service last month affirmed its 'A1' rating and stable outlook on the state's general obligation bonds, noting it expects a budget that does not rely on one-time measures.

However, Moody's said California's already low credit rating could take a hit if there is budget stalemate through summer -- or when, as pundits say, budget negotiations in the state capital of Sacramento start to get serious.

PARTISAN DIVIDE

Democrats and Republicans sparred throughout Friday's session, often in testy exchanges, and split sharply on the budget plan and tax bill.

The plan required a simple majority of lawmakers to approve it, allowing Democrats to override Republican opposition.

Measures on state taxes require two-thirds approval of lawmakers, allowing Republicans in the legislature's minority to block the bill to fund the budget plan.

Democrats responded by advancing a bill that would make it easier for local governments to raise a variety of taxes, including income taxes.

Republicans said tax increases of any kind would set back urgently needed job creation. The alternative of deeper spending cuts would mean less money for schools and public safety programs, Democrats said.

The two sides have been fighting over how best to balance the state's books since January, when Governor Jerry Brown, a Democrat, rolled out his initial budget plan.

It called for spending cuts and raising revenue by extending temporary tax increases set to expire this year. Lawmakers have backed cuts but Democrats and Republicans remain divided over tax extensions.

Brown is currently pressing for a so-called bridge tax for one year on the state's sales and vehicle licenses taxes to help raise revenue for the state.

At the same time he wants lawmakers to advance a measure to the ballot perhaps as soon as September that would ask voters to approve lengthier tax extensions.

Democrats back the extensions, but some have suggested they should try to approve them exclusively in the legislature and skip the referendum Brown wants.

The bridge tax was in the tax bill blocked by Republicans, who say $6.6 billion in better-than-expected revenue forecast by Brown last month should instead be used to help balance the state's books.

Some Republicans have hinted they would be willing to compromise with Brown on a budget plan if Democrats would join with him in talks to craft a spending cap and to overhaul the state's pension system and its environmental regulations.

The state Senate may resume budget deliberations as soon as Saturday. The state Assembly has yet to consider budget bills.

(Editing by Sofina Mirza-Reid)

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