June 17 (Bloomberg) -- California’s Democratic legislative leaders want to raise taxes on oil companies and cigarettes by $2 billion to help close the most-populous U.S. state’s $24 billion budget deficit.

The increases will be included in a budget the Democrats plan to vote on next week, Assembly Speaker Karen Bass said. Democrats say the additional funds are needed to avert Republican Governor Arnold Schwarzenegger’s proposals to cut or eliminate state programs that aid the unemployed and the poor.

“This is a serious response to a serious problem,” Bass, a Democrat from Los Angeles, said in a statement.

The Democrats’ decision sets the stage for a battle with Republican lawmakers just a month and a half before California is forecast to run out of money to pay its bills. Democrats are six votes short of the two-thirds approval needed to increase taxes, allowing Republicans to block passage.

The latest proposals come four months after six Republican lawmakers and Schwarzenegger broke with their party to approve $12 billion in tax increases to end a four-month impasse over what was then a record $42 billion deficit through June 2010. As the economy worsened, the deficits reappeared, and Schwarzenegger has opposed raising taxes again.

Loan Needed

Without a balanced budget, California’s treasurer and controller have said the state will have difficulty securing the short-term loan needed to fund the government until the bulk of tax collections come in later during the budget year. The cash shortage would force California to halt payments to vendors and others with whom it does business so it can meet obligations to schools and bondholders, which receive priority under law.

The pressure led Standard & Poor’s on June 15 to place California’s credit rating, already the lowest among U.S. states, under review for a possible cut.

The Democrat-backed plan would raise $830 million by placing a 9.9 percent tax on oil extracted in California, a move unsuccessfully proposed last year by Schwarzenegger, according to Assembly member Noreen Evans, the Democrat who chairs the joint committee that has reviewed the budget. It would also raise another $1 billion by boosting by $1.50 the cigarette tax, now at 87 cents a pack.

Republican Critics

The planned increases drew criticism from Schwarzenegger and Republicans in the Legislature, who bristled at raising funds at a time when the economy is ailing. Last month, California voters rejected proposals to extend the temporary sales tax increase adopted in February and borrow against the lottery to shore up state finances.

“You cannot tax your way out of a recession,” Senator Robert Dutton, a Republican from Rancho Cucamonga who sits on the budget committee, said in a statement. “It’s time we start taking a look at how we’re doing business here in California. We really need to focus on how much it’s actually costing us to deliver services to the people of California, and we haven’t even started that yet.”

Alicia Trost, a spokeswoman for Democratic Senate President Darrell Steinberg, said tax increases are only a small part of the plan endorsed by Democrats, which also includes fund cuts for schools, prisons, universities.

“They’re just not on board for a small part of it,” she said of the Republicans. “We’ll see what happens on the floor next week.”

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: June 17, 2009 15:10 EDT