By Avram Goldstein and Nadine Elsibai

Feb. 22 (Bloomberg) -- Republican governors attacked President Barack Obama’s economic policies, warning that the $787 billion stimulus package will saddle states with obligations they can’t afford.

Obama’s “short-term” thinking and deficit spending are “digging yet another hole for ourselves,” said South Carolina Governor Mark Sanford, a Republican, on “Fox News Sunday.” He said he may not accept all of the $8 billion in stimulus money designated for his state. Democrats criticized that approach as insensitive.

“This is about real people who, through no fault of their own, are laid off because of a recession, and they need to be able to put food on the table,” said Democratic Governor Jennifer Granholm of Michigan, which has a 10.6 percent unemployment rate, the nation’s highest. Granholm said she would accept all the stimulus money and be “first in line” to “take their dollars too” if South Carolina leaves funds unspent.

The Republican criticism may be a preview of partisan battles later this week when Obama is scheduled to release an outline of his 2010 spending plan. The president plans to cut the federal deficit to $533 billion by 2013 with higher taxes on the wealthiest Americans and an end to the war in Iraq, according to an administration official.

Minnesota Governor Tim Pawlenty, a Republican, said investors won’t take kindly to Obama’s tax policies.

Market Reaction

“Wait ‘til you see the markets’ reaction to what he unveils later this week, which is increasing taxes in the middle of a deep, deep recession,” Pawlenty said on “Fox News Sunday.” “If you believe they’re going to take seriously the idea of cutting down the deficit when they are exploding spending at a historic pace, I’ve got some hunting land for you in northern Minnesota.”

Pennsylvania’s Democratic Governor Edward Rendell said a tax increase won’t hurt.

“We heard these same arguments when Bill Clinton raised taxes on the top 2 percent of the richest people in America to get rid of the deficit,” he said. “And guess what happened? We produced 24 million new jobs. We had the eight years that were the most successful in the second half economically of the 20th century.”

Republican Governor Bobby Jindal of Louisiana, appearing on NBC’s “Meet the Press,” said he is rejecting $100 million in unemployment assistance in the stimulus plan because it would force the state to raise business taxes to pay for the extra aid once the federal dollars run out.

“It requires us to make a permanent change in our law,” he said. “It’s like spending a dollar to get a dime.”

Falling Tax Revenue

Obama’s economic stimulus plan won’t offset falling tax revenue that has forced states to cut spending and raise taxes to balance their budgets, governors meeting in Washington said, including Democrats.

“States have a cumulative deficit that is more than double the money we get,” Rendell said. “There’s not a state in this union that’s going to be able to wipe away all its problems.”

The economic crisis dominated talk at the National Governors Association’s annual winter meeting in Washington this weekend. The Dow Jones Industrial Average hit its lowest level since 1997 last week. Government reports showed industrial output sank in January for a sixth time in seven months and housing starts plunged 17 percent.

Companies from General Motors Corp. to Alcoa Inc. are slashing jobs and cutting production as the recession threatens to become the worst slump in the postwar era.

Pennsylvania’s Woes

Pennsylvania cut $1 billion from its budget and raised $218 million in additional revenue with taxes on tobacco and other products, said Rendell, chairman of the governor’s group. The stimulus, even with about $100 billion in infrastructure spending for states, is no cure-all, he said.

The economic meltdown continues to take its toll: 43 U.S. states report the need for additional spending cuts or tax increases before their current budget years end, the Denver-based National Conference of State Legislatures reports. Thirty-four states face widening budget gaps as they prepare spending plans for the 2009-10 fiscal years.

The request of U.S. carmakers for as much as $21.6 billion in new loans on top of $17.4 billion in aid already provided by President George W. Bush sparked renewed debate today. Senate Minority Leader Mitch McConnell, Republican of Kentucky, said the reorganization proposals from GM and Chrysler LLC are inadequate.

“The companies are not doing what needs to be done to save the companies,” McConnell said on CNN’s “State of the Union” Program. “That puts us on a long-term policy of the government simply propping up this industry endlessly.”

A Wider Meltdown

Ohio Governor Ted Strickland, a Democrat, said the auto industry bailout can prevent a wider meltdown in U.S. manufacturing across a “very fragile” network of parts makers that supply all foreign and domestic carmakers.

“I’ve had officials from the Honda Motor Co. come to me and say to me, ‘Governor, we’re not usually in the business of advocating for our competitors, but it is so important that the auto industry and the Big 3 be preserved,’” Strickland said on CBS’s “Face the Nation.”

The Big 3 are Ford Motor Co., GM and Chrysler.

California Governor Arnold Schwarzenegger, a moderate Republican, issued a plea for cooperation between his party and Democrats.

“They should make an effort to work together and to find what is best for the people, because by derailing everything, it’s not going to help anybody, and it creates instability and insecurity,” he told ABC’s “This Week.”

To contact the reporters on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net; Nadine Elsibai at nelsibai@bloomberg.net