Feb. 16 (Bloomberg) -- California’s legislature adjourned from a marathon budget debate after falling one vote short of a $40 billion package of tax increases, spending cuts and borrowing aimed at reducing a record deficit.

Lawmakers went home at 9 p.m. yesterday after spending 28 hours in session while Republican Governor Arnold Schwarzenegger and Senate leaders worked to secure an additional Republican vote for the package of 27 bills. Schwarzenegger made rare appearances at closed-door party caucuses and urged a quick solution to the impasse.

“We are just searching for that one more vote that we need in order to get that budget done,” Schwarzenegger told reporters after the meeting.

Failure of the package would prolong a four-month stalemate over how to counter a record $42 billion deficit that drained California of cash, left it with the lowest credit rating among U.S. states, forced officials to delay paying bills totaling $3.7 billion and halted $3.8 billion of bond-financed construction on schools, roads and other public works.

The draft bills include plans to raise the state sales-tax rate to 8.25 percent from 7.25 percent; boost vehicle license fees to 1.15 percent from 0.65 percent of the value of an automobile; add 12 cents to the per-gallon gasoline tax; reduce the dependant-care tax credit to $100 from $300 and impose a surcharge on income taxes of up to 5 percent.

Voting Impasse

Democrats lack the votes to obtain the two-thirds supermajority threshold needed to pass tax increases and budgets. To gain approval, three Republican votes are required in the Assembly and another three in the Senate. Legislative leaders have said they have enough votes for the package to pass in the Assembly. Republicans have blocked previous attempts to raise taxes to close the deficit.

Senate President Pro-Tem Darrell Steinberg, a Sacramento Democrat, said Republican holdouts are causing the impasse.

“The majority of the group of senators are stuck with an ideology that says that under no circumstances, no matter how bad the national and international economic crisis is, they will never increase revenue, and that’s untenable,” Steinberg said.

Combined, the measures would raise taxes and fees by $14 billion, cut spending $16 billion and add $10 billion to the state’s debt. Another $2 billion in reserves would be created from funds moved on balance sheets.

‘Counter-Intuitive’

“It’s counter-intuitive to think that you can solve this budget problem in this economy with tax increases,” said Senator Dave Cox, a Sacramento-area Republican who Democrats had counted on to vote for the package. Democrats control both legislative chambers.

Standard & Poor’s cut $46 billion of California’s full- faith-and-credit debt to A from A+ on Feb. 2, making the U.S.’s largest tax-exempt borrower the lowest-rated state. California’s 10-year general-obligation bonds already pay a record 1.23 percentage points in yield above benchmark municipal debt, according to Bloomberg indexes.

Failure of the package would mean the state can’t sell any municipal bonds. State Treasurer Bill Lockyer has halted state debt offerings, saying investors won’t lend California money at affordable rates until the deficit and cash crisis are resolved. The state hasn’t sold general obligation bonds since June and has depleted most funds in its construction account.

The state controller has said more payments to vendors and to counties for health and human services will be delayed and he may begin paying bills with IOUs in April if the impasse isn’t quickly resolved.

Lawmakers are scheduled to reconvene at 11 a.m. Sacramento time today.

To contact the reporter on this story: Michael B. Marois in Sacramento, California, at mmarois@bloomberg.net;

Last Updated: February 16, 2009 01:48 EST