(Adds statement from governor)
By Gary Robertson
RICHMOND, Va., March 24 (Reuters) - Virginia's Democratic governor, Terry McAuliffe, and the state's Republican-dominated House of Delegates on Monday failed to reach an agreement over Medicaid expansion during the first day of a special session called in hopes of reaching a budget deal.
The impasse over Medicaid, the federal health care program for the poor, is holding up passage of a two-year, $96 billion budget. If the two sides fail to reach a deal by July 1, the state government could grind to a halt. Legislators deadlocked over the budget during a 60-day regular session that ended March 8.
McAuliffe, a former Democratic Party fundraiser, proposed on Monday a two-year pilot expansion of Medicaid, which could be terminated if it is unsuccessful, but the proposal was rejected by the House Appropriations Committee.
"I am disappointed that House Republicans voted today to continue Washington-style gridlock instead of accepting a budget that includes a responsible proposal to bring billions of federal dollars back to Virginia to close the health care coverage gap and invest in core priorities like education and mental health," McAuliffe said in a statement.
McAuliffe, who made expanding Medicaid coverage to more than 400,000 Virginians a priority during his gubernatorial campaign in 2013, led a Democratic sweep of statewide offices and had hoped to use those victories to help advance his legislative proposals.
Under the current Medicaid proposal, the federal government would pay the full cost of Virginia's expansion through 2016, then pare its contribution to 90 percent by 2020.
McAuliffe has argued that accepting $2 billion in federal funds to expand Medicaid under the Affordable Care Act would release money that could be used to create jobs, raise state salaries, bolster pensions and come up with health reforms.
But Republicans have called the move unaffordable.
"We're not going to do Medicaid expansion in the budget," Kirk Cox, majority leader of the House of Delegates, said last week.
House Republicans contend the federal government cannot afford to make good on its promise to pick up most of the Medicaid tab. They have spent much of March pointing out the Affordable Care Act's shaky launch.
Republicans in Virginia's lower legislative chamber defeated Medicaid expansion 67-32 in a test vote during the legislature's regular session. Cox said no minds had changed since then.
The evenly split Senate is leaning toward supporting McAuliffe's expansion program. (Editing by Ian Simpson, Jeffrey Benkoe and Meredith Mazzilli)