U.S. Senate approves $26 bln for state aid
* House of Representatives will likely vote on Tuesday
* Legislation would give states $26.1 billion
* Measure paid for by closing tax loopholes, other offsets
By Lisa Lambert and Richard Cowan
WASHINGTON, Aug 5 (Reuters) - The U.S. Senate on Thursday approved an election-year jobs bill that would send states $26.1 billion to help them cope with historic budget shortfalls and give Democratic lawmakers a victory to tout on the campaign trail.
In a vote of 61 to 39, the Senate passed a bill that would send the states $16.1 billion for Medicaid, the healthcare program for the poor, and $10 billion to prevent teacher layoffs. States could face total budget gaps this year of $120 billion.
The U.S. House of Representatives, in a rare move by Speaker Nancy Pelosi, has been summoned back from its August recess to vote on the measure. That is expected to happen on Tuesday. It would then go to President Barack Obama for his signature. Similar measures previously have passed the House.
Republicans say the legislation will add to the deficit and tie states' hands on how to spend the funds. They have attacked it as a "job-killing tax increase."
Democrats facing a wave of anti-Washington anger hope it will convince voters going to the polls on Nov. 2 of their commitment to bring down the U.S. unemployment rate, which is near 10 percent.
The fragile economic recovery is foremost on the minds of voters and candidates for the 435 House seats and 37 Senate seats up for grabs.
Although states have been begging for the Medicaid money, they are wary of the teachers' fund as it requires them to keep education spending at 2008 levels, which many cannot afford.
Supporters say the bill will not add to the deficit because it is paid for by closing tax loopholes, eliminating advance refunds on the earned income tax credit and ending stimulus funds for food stamps earlier than expected.
One loophole that would be closed would raise more than $10 billion over a decade by preventing companies from claiming foreign tax credits for income not yet subject to U.S. tax.
More than half of the 50 U.S. states counted on the additional funds for Medicaid for fiscal 2011, which started last month for many. States use the federal government's reimbursements to run the program.
(Editing by David Alexander and Paul Simao)