SACRAMENTO — Reacting to a fiscal emergency, lawmakers on Friday approved $1 billion in midyear budget cuts but could not muster enough Republican votes to close a tax loophole that allows yacht owners to avoid sales taxes by keeping their new purchases berthed out of state for three months.

Because most of the actions have carryover effects into the coming budget year, analysts say they will reduce by nearly half a shortfall that had been projected to be $14.5 billion.

The spending reductions, approved on bipartisan votes in both houses of the Legislature, take $500 million in unallocated funds from schools. The reductions also save about $1 billion next year by cutting by 10 percent the reimbursement rates paid to doctors and other healthcare providers who treat the approximately 6 million Californians who are insured by Medi-Cal.

Gov. Arnold Schwarzenegger, whose January declaration of a fiscal emergency forced lawmakers to take quick action, praised the Legislature for taking what he called a "first step toward fixing our state budget."

Lawmakers from both parties described the cuts as difficult but said much more difficult challenges lie ahead — starting with finding a way to avoid a $4 billion reduction in school spending that Schwarzenegger has proposed.

Majority Democrats, noting that some Republicans voted against the cuts in Medi-Cal provider rates, said Friday's actions show it will be impossible to balance next year's budget without relying on tax increases to close a part of the state's fiscal hole.

"The rhetoric that we have to have a cuts-only budget lasts right up to the roll call when you have to make the actual cuts," said John Laird, D-Santa Cruz, chairman of the Assembly Budget Committee.

The difficulty of including tax increases as part of the ultimate budget solution was illustrated by the Assembly's rejection of a bill that would have closed the sales tax loophole used by purchasers of private airplanes, yachts and recreational vehicles. The measure failed 45-20, falling nine votes short of the two-thirds requirement needed to approve tax measures.

The change, sought by Schwarzenegger, would have extended from three months to one year the period that buyers would have to keep their purchases out of state in order to escape paying sales taxes.

"To say that it's not OK to tell yacht owners they should not get a big tax break is totally inconsistent with the values of the people of California," said Assembly Speaker Fabian Nuñez, D-Los Angeles. "They ought to pay their taxes. They're getting a tax break they shouldn't be getting."

Some Republicans argued changing the tax law would just inspire wealthy purchasers to keep their planes and yachts permanently out of state, resulting in a loss of California jobs.

"The fact of the matter is that this is shortsighted to the extreme," said Sen. Dennis Hollingsworth, R-Murietta. "There's nothing more mobile than the rich and their toys. They'll find a way around this."

The Senate approved the tax change on a 28-11 vote. Nuñez said he will bring it back to the Assembly for reconsideration next week.

Education advocates said the cuts in school funds should not have an immediate effect on programs.

"It was money that was sitting in accounts that had not been distributed yet," said Assemblywoman Julia Brownley, D-Santa Monica, whose district includes Port Hueneme and much of Oxnard. "Ideally, we would have reinvested it in our schools."

Brownley, who chairs the budget subcommittee on education, said she will resist the spending reductions sought by Schwarzenegger for the next school year.

"I do not want to go down the road of suspending Proposition 98," she said of the constitutional guarantee for school funding. "We've made a little progress with our schools, but if we do that we're going to take a huge step backward."

Healthcare advocates said the decision to reduce Medi-Cal reimbursement rates, already among the lowest in the nation, will result in a devastating loss of access to healthcare for the poor.

"These cuts could break the back of a healthcare system that is already under serious strain," said Dr. Richard Frankenstein, president of the California Medical Association. "Medi-Cal patients will be forced into emergency rooms for their primary care, driving up costs and compromising access to emergency services for all Californians."

Nuñez said lawmakers will attempt to restore the cuts in the 2008-09 budget.

For that to happen, he said, ordinary Californians are going to have to rise up and protest the reductions in services.

It will take public pressure to generate enough votes to enact tax increases or close tax loopholes, he said.

"The budget is not going to get balanced without voters intervening. Otherwise, we will be deadlocked."