Citing separation of powers, the state's 3rd District Court of Appeal in Sacramento ruled Wednesday it could not intervene because Gov. Arnold Schwarzenegger had not signed the bill into law.

The lawsuit was filed by the Howard Jarvis Taxpayers Association, with support from most Republican state lawmakers. It argued that the Democratic majority acted illegally when it passed the tax increases because it did so with a simple majority vote.

The state Constitution requires a two-thirds majority for tax increases.

John Coupal, president of the taxpayers association, said the group was considering an appeal to the state Supreme Court and a new lawsuit in federal court because the vote violated the constitutional rights of the Republican minority members.

"We are still looking at this case for potential appeals because we believe this issue needs to be resolved," he said.

Schwarzenegger vetoed the $18 billion proposal, which included a mix of tax increases and spending cuts as a way to start closing California's $42 billion budget deficit. The governor said the package didn't make enough labor and environmental concessions.

The 33-year-old driver was indicted Thursday on charges of conspiracy and six counts of tax evasion for purportedly failing to report to the IRS about $5.5 million in income between 1999 and 2004, according to court documents. Each count carries a maximum five-year prison sentence.

One of his attorneys, David Garvin, said he was disappointed that the tax dispute could not be resolved without criminal charges.

"Helio has always done the appropriate thing and hired accountants and attorneys he relied upon," Garvin said. "We are of the strong belief that he did not do anything wrong. We're looking forward to going to court."

Castroneves, a native of Sao Paulo, Brazil, has won the Indianapolis 500 twice and finished second this year in the IndyCar Series points standings. He and partner Julianne Hough won the 2007 "Dancing with the Stars" TV reality show competition on ABC.

The indictment charges that Castroneves illegally concealed income from Penske Racing Inc. and the Brazilian firm Coimex International S.A. Neither company is charged with any wrongdoing.

Also facing charges are Katiucia Castroneves, the driver's sister and business manager, and attorney Alan R. Miller of Birmingham, Mich. They also were scheduled to make court appearances Friday.

Miller's attorney, Michael Tein, said prosecutors acted "recklessly" in bringing the charges and said Miller has always had "an absolutely stellar" legal reputation.

Not only that, but tax experts say potentially millions of other taxpayers could benefit from his victory.

The accountant from Baxter, Minn., challenged the method the IRS has used for more than 20 years to tax shares and cash distributed by mutual life insurance firms to their policyholders when they reorganize as public companies.

A federal court recently agreed with his interpretation.

"There's a tremendous amount of money at stake," said Robert Willens, a New York City-based tax analyst at Robert Willens LLC. "Tens of thousands of people could be in line for a refund."

Don Alexander, an IRS commissioner in the 1970s and now a tax attorney in Washington, said while it's not unusual for individuals to take on the agency, "most of them lose."

Alexander called it "quite a significant case."

The dispute arose when more than 30 mutual life insurance companies became publicly traded corporations in the late 1990s and earlier this decade, in a process known as "demutualization."

Mutual companies are owned by their policyholders, so the companies provided stock and cash to compensate them for the loss of their ownership interests when they went public.

Cigarette-maker Philip Morris, supports a New York state Assembly bill that would solve a long battle over collecting taxes on cigarettes sold by Indian reservation stores by making wholesalers pay the levy, a company spokesman said on Thursday.

The Indian tribes would then seek refunds for the taxes paid on any cigarettes that were sold to other Indians, explained David Sutton, a spokesman for Altria Group, which owns Philip Morris.

"But if you or I went as non-Native Americans consumers, the tax on the product would have already been paid on the wholesale level and they would not be entitled to a refund of that tax under this bill because you and I are not tribal members," he explained.

New York's tax revenues have dropped with Wall Street's profits, and the legislature returns next week for a special session to tackle the three-year, $26 billion deficit.

Estimates of how much the state loses by failing to collect the cigarette taxes range from several hundred million dollars a year to as much as $1 billion.

The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.

Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.

"It's shameful that so many corporations make big profits and pay nothing to support our country," said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called "S" corporations pay taxes under individual tax codes.

"Half of all business income in the United States now ends up going through the individual tax code," Edwards said.

The GAO study did not investigate why corporations weren't paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits.

More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales. About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.

The GAO said it analyzed data from the Internal Revenue Service, examining samples of corporate returns for the years 1998 through 2005. For 2005, for example, it reviewed 110,003 tax returns from among more than 1.2 million corporations doing business in the U.S.

Dorgan and Levin have complained about companies abusing transfer prices — amounts charged on transactions between companies in a group, such as a parent and subsidiary. In some cases, multinational companies can manipulate transfer prices to shift income from higher to lower tax jurisdictions, cutting their tax liabilities. The GAO did not suggest which companies might be doing this.

Faced with a $15 billion budget shortfall and a testy State Legislature, Gov. Arnold Schwarzenegger is dealing with a host of critics, including pro-tax Democrats, tax-averse Republicans and a public increasingly displeased with him.

Now, even the state’s computers seem to be against him.

Last week, with no budget agreement in sight, the governor issued an executive order terminating thousands of part-time and temporary state employees and slashing the wages of about 170,000 of the state’s full-time workers to the federal minimum wage.

But the California controller, John Chiang, says the state’s payroll system — which uses a programming throwback known as Cobol, or Common Business-Oriented Language — is so antiquated it would take months to make the changes to workers’ checks.

“In 2003, my office tried to see if we could reconfigure our system to do such a task,” Mr. Chiang told a State Senate committee on Monday. “And after 12 months, we stopped without a feasible solution.”

David J. Farber, a computer science professor at Carnegie Mellon University, said using Cobol was roughly equivalent to having “a television with vacuum tubes.”

“There are no Cobol programmers around anymore,” Mr. Farber said. “They retired centuries ago.”

Mr. Farber said California was not alone in having out-of-date systems — or handy excuses.

“It’s old technology, and you can’t find a repairman who knows how to fix it,” he said. “It also a neat way of figuring how not to get your salary cut.”

Even before his remarks to the Legislature, Mr. Chiang, a Democrat, had made no secret of his dislike for the order by Mr. Schwarzenegger, a Republican, saying he would refuse to follow it even if the state’s computers could handle the job. The governor, in turn, has threatened to sue Mr. Chiang to force the pay cuts, saying Mr. Chiang was violating a 2003 California court decision mandating that state employees take minimum wage if the Legislature does not pass a budget.

The current budget expired on July 1. Negotiations among lawmakers have been as sluggish as the state’s computers.