California lawmakers were headed late Monday toward approving a state budget deal that Gov. Arnold Schwarzenegger is likely to veto, one that borrows billions from taxpayers and fails to prevent future financial trouble.

A key element of the plan would increase taxpayers' income tax withholding by 10 percent, then return any overpayment later in the form of refunds.

The pact is an attempt to end the state's 11-week budget impasse, the longest in state history. But it doesn't make a permanent dent in California's ongoing gap between income and spending.

The compromise, cobbled together privately by legislative leaders over the weekend, scraps Schwarzenegger's plan for a temporary sales tax hike.

It cuts Medi-Cal provider rates and suspends cost-of-living benefit increases for low-income elderly, blind and disabled people on SSI/SSP and for welfare families. Schools wouldn't get the full cost-of-living increase they had hoped for.

But much of the $15.2 billion budget shortfall in the state's $100 billion-plus general fund would be bridged by advancing revenues to be collected in future years, shifting or borrowing money from other state funds and employing accounting maneuvers. The plan would generate immediate revenue but leave gaping holes in future budgets.

Schwarzenegger, who failed to garner enough votes for his own budget proposal, sent a letter to legislative leaders Monday saying that long-term changes proposed for the state's budget system - including establishing a "rainy-day" fund - were not sufficient to gain his signature.

Communications Director Matt David said the proposal contains a "fatal flaw" that the governor cannot support.

"The governor's request to limit when and how much money can be transferred out of the rainy-day fund addresses a fatal flaw in the legislature's proposal," David said. "Without this restriction, the rainy-day fund turns into nothing more than a slush fund that can be raided at any point and up to any amount. "The governor's request is fiscally responsible because it guarantees that the rainy-day fund can only be used in slow economic years - like this year - when revenues fall below projected spending."

Passage of a state budget requires a two-thirds majority of both legislative houses, thus requiring at least two Republican votes in the Senate and six in the Assembly.

If Schwarzenegger vetoes a budget bill, lawmakers conceivably could override his decision by a similar supermajority vote.

Assembly Speaker Karen Bass, D-Los Angeles, said that time is of the essence, with billions of dollars being withheld from state programs and vendors without an approved budget for the fiscal year that began July 1.

"To wait any longer, I would not want to do that," Bass said. "If we wait, there's more pain inflicted on Californians. ... (And) it would just allow more time for votes to be peeled off."

In crafting the compromise, legislative leaders replaced Schwarzenegger's proposed three-year, 1-cent sales tax hike with roughly $4 billion raised by hastening - but not increasing - tax obligations.

Quarterly filers and millionaires who experience an income windfall would be required to make more of their payments sooner. Other Californians would see a 10 percent increase in income tax withholding. Taxpayers would be reimbursed for any overpayment when they file their taxes in 2010.

"You might look at it as a no-interest loan from taxpayers in the state," said Jean Ross of the California Budget Project, an advocacy group for the working poor. "We're not solving California's real long-term structural problem." Senate President Pro Tem Don Perata, who once vowed to make tax increases part of the solution, said the patchwork budget moves the state "one step closer to fiscal disaster" even as he led floor action to approve it.

Perata said the state will be forced to borrow more money next year to sustain services. "It's a Ponzi scheme. Sooner or latter it's going to collapse," the Oakland Democrat said.

The scramble to rush a legislative vote on the deal meant that the public had no opportunity to read, analyze or comment on details of the spending plan. "It's probably the worst way to pass a budget," said Tracy Westen, chief executive officer of the Center for Governmental Studies in Los Angeles. "I think voter confidence in the Legislature is very low. This is not going to help."

A key part of the plan would restrict businesses, for two years, from writing off losses and reduce their use of tax credits for research and other items.

But it would then allow businesses to recoup the money and expand the tax break in future years.

"We're just opening huge corporate loopholes in the future in exchange for borrowing," said Lenny Goldberg, executive director of the left-leaning California Tax Reform Association.

The proposal up for a vote Monday also would:

• Place a ballot measure before voters to alter the state lottery and to borrow money for next year's budget from future proceeds.

• Increase the state's rainy-day fund and give the governor limited authority to cut spending during a midyear budget crisis.

• Close a tax loophole allowing the purchasers of yachts and aircraft to dodge paying California sales tax.

Bass conceded Monday that the spending restraints are not as strong as those Schwarzenegger sought. Neither Democrats nor Republicans got everything they wanted in the compromise, she said.

"I know that we're not sending (Schwarzenegger) the budget that he wanted," said Bass, D-Los Angeles. "But this isn't the budget that any of us wants."

Call Jim Sanders, Bee Capitol Bureau, (916) 326-5538.