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.