In exchange, legislative sources say the Schwarzenegger administration wants to allow businesses like banks to amend previous tax returns at the urging of lenders and other corporate interests.
"If you're going to take something, incentives, away from business in the form of this tax credit, we do feel that they need to be made whole in the future," said Beth Mills of the California Bankers Association.
Banks could amend tax returns from their record-profit years of 2005 and 2006 by writing off their record losses from the current foreclosure crisis.
Those financial institutions would ultimately get tax refunds from the state totaling more than $400 million in 2010, when the companies would be entitled to them.
"It's certainly a bail-out," said Jean Ross with the California Budget Project. "I don't think that you'll see checks getting written to homeowners to help them out on their mortgages as a result of this."
Assemblyman Ted Lieu (D-Torrance), who is spear-heading a crackdown on subprime lenders, cannot even stomach the proposal, given the massive cuts to state programs.
"We're trying to protect healthcare, preserve education. Giving tax breaks to subprime lenders should be nowhere on the priority," said Assemblyman Lieu.
Republicans are entertaining the idea as part of a bigger economic stimulus package.
"The key right now is to focus on those who are in homes that are in tenuous positions and how do we benefit them. That's the key. If we can do that by helping the tax code, that's one thing we can look at," said Assemblyman Mike Villines (R-Clovis).
The governor's aides did not want to talk about the proposal, but it is the latest sticking point that threatens to drag negotiations for a budget that is now seven weeks late.