Schwarzenegger, who has insisted repeatedly he would not raise taxes, suggested the state's $15.2-billion budget deficit could be closed with a temporary hike of one-cent in the sales tax, coupled with agreement by legislative leaders to restrain spending and give the governor authority to cut programs when California's budget is in deficit, Democratic and Republican legislative sources told the newspaper.

The tax hike would take effect immediately and would remain in effect for three to four years, at which time the sales tax would be lowered incrementally to a lower rate than the current level of 7.25 percent. That would allow Schwarzenegger to characterize the change, over time, as a tax cut, the Times said.

A one-cent sales tax hike could raise more than $5 billion a year, the report said.

Schwarzenegger last week ordered the layoff of more than 10,000 state employees, in a move officials said would save the state $1.2 billion per month. However, state employees performing critical health and safety functions and those whose jobs bring in revenue were exempted, and analysts said the move may not save as much money as the governor hoped.