If no agreement is reached, Californians would pay higher social security and federal income taxes.
Economists say the scale and the magnitude of the tax increases are virtually unprecedented and could trigger a recession.
The Legislative Analyst's Office says even a mild recession would cut into state revenues, just as California's budget is beginning to recover.
Under one scenario, it could cost the state $11-billion over two years. Loree Levy with the Employment Development Department says about 400,000 unemployed Californians would also lose their federally extended benefits.
LEVY: "This is a big deal and it doesn't matter if you even have a remaining balance on a federal extension claim, come the week ending December 29th, we won't be able to pay any more federal extension benefits unless Congress and the President Act."
Levy says the Department has spent the last two months sending out notices to the unemployed that their benefits could end.