SACRAMENTO, Calif. -- Republicans on Sunday rejected a Democratic proposal for $6.6 billion in tax increases on the wealthy and corporations despite an offer to boost the state's rainy day fund. The failed vote now pushes California's budget impasse into its eighth week with no compromise in sight.

Assembly Minority Leader Mike Villines, R-Clovis, said economic incentives would work much better than tax increases and demanded a spending cap. "I think we can do a better job," Villines said toward the end of over four hours of debate in which 49 of the Assembly's 80 members spoke. "I think we can do a much better job ... and not increase taxes."

The 45-30 vote was the first since the state began its new fiscal year July 1 without a budget.

Democrats offered a revised tax plan that's smaller than the $8.2 billion package they initially proposed last month. Under the new proposal, Democrats called for imposing top income tax brackets of 10 percent on joint filers making more than $321,000 per year, and 11 percent on the portion above $642,000. The highest tax bracket is currently 9.3 percent.

The proposal called for a temporary suspension on the net operating loss deduction allowed for businesses. And it reinstates a higher corporate tax rate.

Assembly Speaker Karen Bass, D-Los Angeles, characterized the package as a compromise because it contained both cuts and new revenues. She said her plan reinstates tax brackets that were last in place under former Gov. Pete Wilson, a Republican, in the 1990s.

"Several years ago the economy was strong we gave that break to people who made over half a million dollars," Bass said. "Now the economy is weak, we need to this group of Californians to contribute to the economy so those people who make $60,000, $40,000, $30,000 a year can afford to send their children to school."

The Democratic leader said she incorporated changes requested by the governor and Republicans. It added a constitutional amendment for increasing the state's existing rainy day fund from 5 to 10 percent of general fund revenues.

It also includes measures that would allow the state to borrow $10 billion from future lottery funds to generate more revenue. According to the Democrats' plan, lottery proceeds would go toward retiring debt and filling the rainy day fund beginning in the 2009-10 fiscal year.

GOP members, whose votes are needed for a two-thirds vote, said they refuse to burden people with taxes while the economy remains weak. California's unemployment rate is now 7.3 percent, the highest in 12 years.

Republicans warned that the Democrats' plan would do little to control state spending because the rainy day plan lacks effective controls to make sure money is being saved and not tapped during non-emergencies.

"We spend every penny the state receives ... and we spend them on new programs and bigger government," said Assemblyman Roger Niello, R-Fair Oaks. "We don't save anything for the future."

Last week Republicans proposed a spending cap that would have restricted growth to population change and inflation. The plan was rejected by Democrats, who hold a majority in both houses.

Bass warned that the Legislature's failure to deliver a spending plan would soon force the state to take on loans that will burden taxpayers with an additional $300 million to $400 million in debt.

"This is day 48 without a budget," Bass said Sunday. "If we don't pass a budget soon, we are going to have to engage in a different type of borrowing: Borrowing just to pay the day to day services that the state provides."

The Democrats' plan removed an earlier proposal to roll back dependent care credit and eliminate the annual inflation indexing of state income tax brackets this year. It retained a tax amnesty program to generate $1.3 billion.

Senate Minority Leader Dave Cogdill, R-Modesto, has said GOP members don't plan to release their own spending plan. Instead, he said Republicans are demanding a spending cap, a tougher rainy day fund and a way for the governor to make midyear cuts when revenues fall below projections.

Gov. Arnold Schwarzenegger, who underwent arthroscopic surgery on his knee Saturday, has been unsuccessful in leading negotiations. Democrats recently backed off from a temporary 1 percent sales tax Schwarzenegger proposed.

Schwarzenegger has tried to add pressure to the talks by laying off more than 10,000 state workers and trying to roll back wages for about 175,000 other employees. Some would receive the federal minimum wage of $6.55 an hour under Schwarzenegger's order, which is being challenged by state Controller John Chiang.

California is the last state in the nation on a July fiscal calendar to enact a budget.