*

Senate marathon voting continues overnight

*

Democrats criticize bill for Medicaid cuts

*

Senate Republicans face internal divisions over debt

impact

*

Rand Paul opposes bill due to $5 trillion borrowing limit

hike

*

Musk says he'll target bill-backers in 2026 mid-term

election

(Updates with votes on AI regulation in paragraph 3 and other

amendments in paragraphs 15-17)

By David Morgan, Richard Cowan and Bo Erickson

WASHINGTON, July 1 (Reuters) - U.S. Senate Republicans

sought to pass President Donald Trump's sweeping tax-cut and

spending bill early on Tuesday morning, despite divisions within

the party about its expected $3.3 trillion hit to the nation's

debt pile.

Senators voted in a marathon session known as a

"vote-a-rama", featuring a series of amendments by Republicans

and the minority Democrats, part of the arcane process

Republicans are using to bypass Senate rules that normally

require 60 of the chamber's 100 members to agree on legislation.

In the predawn hours, the lawmakers voted 99-1 to strip out

a 10-year federal moratorium on state regulation of artificial

intelligence, which supporters had promoted as a way to free

innovation from a panoply of differing requirements.

Beginning early on Monday and running for roughly 19 hours,

it was still unclear how long the voting would last.

Republicans can afford to lose no more than three votes in

either chamber to pass a bill the Democrats are united in

opposition to.

The nonpartisan Congressional Budget Office released its

assessment on Sunday of the bill's hit to the $36.2 trillion

U.S. debt pile. The Senate version is estimated to cost $3.3

trillion, $800 billion more than the version passed last month

in the House of Representatives.

Many Republicans dispute that claim, contending that

extending existing policy will not add to the debt. Nonetheless,

international bond investors see incentives to diversify out of

the U.S. Treasury market.

Democrats, meanwhile, hope the latest, eye-widening figure

could stoke enough anxiety among fiscally minded conservatives

to get them to buck their party, which controls both chambers of

Congress.

"This bill, as we have said for months, steals people's

healthcare, jacks up their electricity bill to pay for tax

breaks for billionaires," Democratic Senate Minority Leader

Chuck Schumer said in a speech to the Senate.

Senate Majority Leader John Thune countered that the tax

cuts would help families and small businesses, as he defended

spending reductions to social safety net programs.

He said Medicaid was growing at an unsustainable rate and

there were some improvements and reforms to make it more

efficient.

Trump wants the 940-page bill passed before the July 4

Independence Day holiday.

BILL POLITICS

Amendments proposed by Democratic senators, such as the

proposed limiting cuts to Medicaid, were rejected by the

Republican majority.

Embedded in the Senate Republicans' bill are several

hot-button political issues, including a prohibition of Medicaid

funding for a list of almost 30 medical procedures related to

gender transition, as well as an increase of immigration-related

funding for criminal and gang checks for unaccompanied migrant

children, including examinations of "gang-related tattoos" for

children as young as 12 years old.

Early on Tuesday, the Senate also adopted an amendment

offered by Republican Senator Joni Ernst to prevent jobless

millionaires from claiming unemployment compensation.

Democrats and Republicans voted down an attempt by

Republican Senator Susan Collins to cushion the impact of

Medicaid cuts on rural health facilities by doubling federal

support to $50 billion over five years and paying for the

increase by raising the top federal tax rate. The measure still

drew support from 18 Republicans.

Some Republicans, including Senator Lisa Murkowski and

Collins, backed a handful of Democratic amendments on social

issues, including Medicaid. But the initiatives still failed.

Elon Musk, formerly appointed by Trump to spearhead his

government cost-cutting plan before the pair had a public

falling-out in June over the budget bill, threatened on Monday

to target Republicans ahead of the 2026 mid-term election.

"Every member of Congress who campaigned on reducing

government spending and then immediately voted for the biggest

debt increase in history should hang their head in shame!," Musk

posted on X.

The U.S. Chamber of Commerce, which says the majority of its

members are small businesses, backs the bill.

However, John Arensmeyer, who represents more than 85,000

small enterprises at the Small Business Majority, cautioned that

the business tax relief was currently skewed to the wealthiest,

top 5% of small businesses.

DEBT CEILING DEADLINE

The Republican measure contains a $5 trillion debt ceiling

increase - $1 trillion more than the House's bill - but failure

to pass some version would present lawmakers with a serious

deadline later this summer, when the Treasury Department could

come close to exhausting its borrowing authority and thus risk a

devastating default.

The debt limit increase has caused Senator Rand Paul of

Kentucky to come out in opposition to the bill, joining fellow

Republican Thom Tillis, who decried its cuts to Medicaid and

clean energy initiatives.

According to the Congressional Budget Office, the Senate

bill would result in about 11.8 million additional uninsured

people, surpassing estimates for the House's version.

If the Senate succeeds in passing the bill, it will then go

to the House, where members are also divided, with some angry

about its cost and others worried about cuts to the Medicaid

program.

The megabill would extend the 2017 tax cuts that were

Trump's main legislative achievement during his first term as

president, cut other taxes and boost spending on the military

and border security.

Senate Republicans, who reject the budget office's estimates

on the cost of the legislation, are set on using an alternative

calculation method that does not factor in costs from extending

the 2017 tax cuts.

Outside tax experts, like Andrew Lautz from the nonpartisan

think tank Bipartisan Policy Center, call it a "magic trick".

Using this calculation method, the Senate Republicans'

budget bill appears to cost substantially less and seems to save

$500 billion, according to the BPC analysis.

(Writing by Richard Cowan and Costas Pitas; Editing by Michael

Perry and Alex Richardson)