UPDATE 1-New York state budget deal includes minimum wage hike, tax cuts

* Budget to make deadline for third consecutive year

* Minimum wage set to rise

* High-earner surcharge extended

* Utility tax to be phased out

(Adds analyst quote) By Edward Krudy

NEW YORK, March 21 (Reuters) - New York state's leaders have agreed a tentative $135 billion budget deal for fiscal year 2013-2014 that raises the minimum wage, gives tax breaks to middle-class families and businesses, and extends a tax on high earners.

The deal was announced in Albany, the state capital, after days of closed-door wrangling as lawmakers sought to reconcile three separate proposals.

The agreement paves the way for a vote by the legislature this weekend, setting this year's budget on course to be the third in a row to be passed on time. The budget could be the earliest since 1976.

State Governor Andrew Cuomo, a Democrat, said the deal was still subject to minor changes, but said the vote could take place on Saturday or Sunday - well ahead of the deadline of April 1, when the new fiscal year begins.

"For the first time in almost three decades our state is poised to pass its third on time fiscally responsible budget in a row," said Cuomo in a statement. "A feat that is restoring public and investor confidence in our state's finances and economic future."

There is a Democratic majority in New York's state legislature but a power sharing agreement with Republicans in the state Senate can complicate negotiations.

The state's minimum wage, now at $7.25 an hour, would rise to $9 an hour by 2015, if the budget is approved by the legislature. That would be accompanied by a business tax cut that includes phasing out a tax on utility companies over three years, starting in 2014-2015. The business tax cut includes breaks for business that employ young people and veterans.

Middle-class families with children will get a tax cut of $350. The agreement defines middle class as those earning $40,000 to $300,000 per year. The middle class tax cut will reduce revenues by $1.1 billion over three years.

A surcharge on high-earning couples, making over $2 million a year, or single filers making over $1 million, is being extended. Introduced in 2011, it was set to expire in 2014.

The tax deal is already reigniting a longstanding debate about how taxpayers should share the burden of funding cash-strapped public services, and whether tax cuts are affordable as many municipalities struggle to close budget deficits.

Carol Kellermann, an analyst at Citizens Budget Commission, which describes itself as an independent budget watchdog, faults the extension of the surcharge on wealthy earners to fund tax cuts in other groups rather than using it to tackle deficits.

"It makes it pretty clear that there's no such thing as a temporary surcharge. Everything becomes permanent," said Kellermann. "There is still a structural deficit problem in New York and this is not being used to address that."

The surcharge adds abut $1.9 billion in revenue per year to the state.

(Reporting by Edward Krudy; Editing by Jan Paschal and Nick Zieminski)

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Keywords: USA NEWYORK/BUDGET