Legislative Analyst Elizabeth Hill thinks it's a sensible way to help balance the state budget: lower the extra amount families can write off on their state income taxes for dependent children.

The exemption – $294 per child compared to $94 for mothers and fathers – is only 10 years old, and disproportionately favors those making more than $50,000 a year. It would save the state $1.3 billion.

But Republicans say it amounts to a tax increase, which they won't support in any form. And Democrats pushing for higher taxes won't touch it, saying it would hurt working families.

So goes the effort to balance the state's budget, lopsided by at least $8 billion for the fiscal year that begins July 1.

All the easy decisions have been made, and only difficult ones remain.

Teachers aren't sure if they will have a job next school year. Doctors may reject low-income families because state-sponsored insurance hasn't kept up with the rising cost of health care. And thousands of state workers are watching their labor contracts expire.

Gov. Arnold Schwarzenegger and legislative leaders have met once since the first round of emergency cuts – and Senate President Pro Tem Don Perata didn't show up.

"These options are really hard," said F. Noel Perry, founder of Next 10, a nonprofit organization aimed at informing the public about the budget process. "I'm careful not to fault legislators in so far as Californians don't want to pay a lot of taxes, but they do want some services."

Perry said most high school students who take the group's Web quiz – called the California Budget Challenge (www.nextten.org) – don't successfully balance the budget.

Even an expert who has monitored the budget for years predicted the challenge is so daunting this year that the governor and lawmakers might ultimately have to ask voters to make the decisions.

Fred Silva, a fiscal policy adviser at Beacon Economics consulting firm and a former legislative budget consultant, said he would not be surprised if the governor reintroduces leasing the lottery as part of his revised budget proposal next month. Such a move would require voters to approve changes to existing lottery laws.

"I would not be surprised if a budget is enacted with a measure that has to be placed on the ballot," Silva said.

Schwarzenegger kicked off this year's budget debate in January by proposing a 10 percent across-the-board reduction at all state departments and agencies.

Topping his list was a $4.8 billion cut from the amount public schools are projected to need to cover inflationary costs next year. The thought of layoffs has agitated the powerful California Teachers Association, which has drummed up protests, rallies and a statewide "Cuts Hurt" bus tour featuring a band called "Angry Tired Teachers."

Schwarzenegger also proposed saving the state $2.7 billion by reducing welfare, health care, foster care, AIDS prevention and assistance for the elderly and disabled. Protests at the Capitol have become the norm as doctors threaten to sue the state over a 10 percent Medi-Cal reimbursement cut about to take effect in July.

Fearful of the potential fallout, no lawmaker has openly endorsed the governor's early inmate release plan to save $379million in 2008-09, out of fear for public safety.

In general, the governor's across-the-board approach has been hammered for failing to prioritize state programs.

"The impact of a cuts-only solution would be devastating on schools, health care, programs for people with disabilities," said Jean Ross, executive director of the California Budget Project, a research group that advocates for working families. "I think it's essential that we have a balanced solution."

Despite heavy opposition to cuts, the idea of raising taxes may be even more daunting. Schwarzenegger in recent weeks has softened his anti-tax rhetoric, calling on lawmakers to "get very creative," but his fellow Republicans in the Legislature are adamant that taxes in any form are not negotiable.

Dim political prospects have not suppressed interest in revenue proposals, however.

Schwarzenegger supported closing a $21 million loophole on boats, planes and motor homes and Assembly Speaker Fabian Núñez pushed a $1.2 billion oil tax. Both bills were killed by Republicans, whose votes are needed to pass tax increases.

Hill, who has been the Legislature's nonpartisan advisor for 22 years, crafted an alternative budget that would cut nonessential services and raise taxes to generate $2.7 billion in the 2008-09 fiscal year.

In addition to reducing dependent care credit, she proposed limiting the state's research and development tax credits, which are more generous than the federal government's.

However, Sen. Dave Cogdill of Modesto, the GOP's incoming leader, said the state should not take away credits at a time when the economy is struggling.

Ross, among others, has suggested the state restore higher vehicle license fees or reverse corporate tax breaks to generate billions of dollars.

Other ideas that have yet to gain traction would raise income taxes on high-wage earners or amend Proposition 13 to assess businesses in the same way as residential property. The latter, known as "split-roll" property tax, would require that commercial and industrial properties be reassessed more regularly, bringing the state an estimated $3 billion annually.

Cogdill dismissed all as non-starters.

"We should help the general fund by stimulating the economy and be a more beneficial partner with industry, rather than stifling them," Cogdill said.