Democratic legislators trotted out a stick-and-carrot approach to closing the state's budget gap Sunday night, negotiating with the governor on one floor of the Capitol while voting for a package of cuts and taxes on another.

Majority Democrats in the Assembly were voting late Sunday on a $23.4 billion package of spending cuts, tax and fee increases, and accounting tricks designed to close a gaping hole in the budget for the fiscal year that starts Wednesday.

Unlike last week's efforts, when at least some Republican votes were needed to pass the bills so they could take effect immediately, Sunday's package required simple majority votes, which Democrats could provide.

The difference is the bills would not take effect until 90 days after Gov. Arnold Schwarzenegger signs them – and he has made clear he opposes any deal that includes taxes and fees.

Sunday night's package included a 9.9 percent tax on oil production, a $1.50-per-package tax on cigarettes and a $15 per vehicle registration fee.

While tax hikes normally require two-thirds approval, Democrats argued that by eliminating an 18-cent per-gallon excise tax on gasoline, the net revenue to the state becomes zero and thus doesn't represent a tax hike. Sunday's bills then would replace the excise tax with an equivalent fee, which Democrats argue does not require a two-thirds vote.

The Assembly spent nearly two hours Sunday night debating the linchpin measure of the Democratic package, Assembly Bill 39, which included the revenue increases. The bill ultimately passed, 44-30, with two Democrats voting no.

Democrats argued that the state is in the throes of the worst fiscal crisis since the Great Depression and that it would be immoral not to generate new revenues, thus risking, they said, indefensible cuts to schools and devastation of the safety net for needy and disabled Californians.

"Lives are on the line," said Assemblyman Bill Monning, D-Carmel. "We must protect those lives."

"I think we need to look at it as an investment," Assemblyman Tom Torlakson, D-Antioch, said of the proposed tax increases.

But Republicans argued it's wrong to raise taxes in a fragile economy, and that voters soundly rejected the notion of increased revenues to help bridge the state's budget gap.

"What do they have to do - throw (every legislator) out before we get it?" asked Assemblywoman Diane Harkey, R-Dana Point.

Assemblyman Anthony Adams, R-Hesperia, said the proposed oil and gasoline tax hikes are unfair because they target specific groups.

"How can you in good conscience ask one group to foot the bill" for public services that benefit all, he asked.

The Senate adjourned at 9:30 p.m. Senate President Pro Tem Darrell Steinberg, D-Sacramento, said that senators would take up the majority vote package this morning. Asked if there had been progress in talks with the governor, Steinberg said, "I wouldn't call it progress."

Besides facing almost certain veto by the governor, the plan would do nothing to head off a warning by state Controller John Chiang that he'll be forced to issue IOUs Thursday if a balanced budget is not in place Wednesday.

Assembly Speaker Karen Bass, D-Los Angeles, said it was important for the Assembly to act quickly.

Earlier in the day, Bass and Steinberg emerged from Schwarzenegger's office but gave no specific details on where talks stood. "There's going to be a little, or a lot, of shuttling," said Steinberg. "It's shuttle diplomacy."

On Saturday, Schwarzenegger gave legislative leaders a list of structural changes in state government that he'd like to see, including a major change in state employee pensions. He is asking Democrats to establish a far less lucrative retirement plan for state employees who are hired after Wednesday. The plan would roll back for newly hired employees pension enhancements that lawmakers and former Gov. Gray Davis approved a decade ago.

If approved, the plan would not affect the retirement plan of current state employees.

Governor's spokesman Aaron McLear acknowledged the change would save no money in the coming fiscal year. But he noted that Governor's Office documents estimate it could save as much as $74 billion in reduced pension costs by 2040.

Steinberg hinted that the governor raised additional issues Sunday. "There have been a lot of policy-related issues that have been floating around, you might say, for a while, and the administration wants to talk about some of those," Steinberg said.

"We are always willing to listen … but our responsibility is to fashion a $20-plus billion deficit solution before John Chiang begins issuing IOUs."

Call Steve Wiegand, Bee Capitol Bureau, (916) 321-1076.