* Reid wants revenue to replace automatic cuts
* Democrats target tax credits, loopholes for oil firms
By David Lawder and Richard Cowan
WASHINGTON, Jan 29 (Reuters) - The top U.S. Senate Democrat said on Tuesday that he wants increased tax revenues to help replace the automatic spending cuts looming on March 1, a demand that could reignite partisan budget tensions.
Senate Majority Leader Harry Reid said Democrats are working on alternatives to the $85 billion in delayed, across-the-board spending cuts, known as the sequester. They will seek to end some tax credits and close loopholes - possibly some for oil companies - to find revenues to help replace the cuts, he said.
"There's a lot of things we can do out there, and we're going to make an effort to make sure that sequestration involves revenue," Reid told reporters in the Capitol.
He said there was "low hanging fruit" among deductions and credits in the tax code that Republican have agreed should be cut.
The sequester is a holdover from a 2011 budget deal that lifted the debt limit and set in place $1.2 trillion of across-the-board spending cuts. These were meant to be so painful that Congress would have no choice but to replace them with other budget savings, but bitterly divided lawmakers could never agree on a plan.
Even after the New Year's fiscal cliff deal raised tax rates on couples earning over $450,000 a year, Reid said Americans still want the wealthy to pay more in taxes and do not want the Medicare health program for the elderly "whacked."
"Part of it is the wealthiest people in America paying a little bit more. It should be a balance of spending cuts and revenue," he said, adding that Democrats would discuss their plans at a retreat next week.
Reid's call for revenue associated with the sequestration cuts is part of a growing chorus of Democrats demanding that the wealthy pay more in taxes to reduce deficits without resorting to big cuts to health care benefits and other social safety net programs.
Senate Budget Committee Chairman Patty Murray last week told Senate Democrats that she would include new revenue sources in a fiscal 2014 budget resolution that she expects will win Senate approval this year.
Republicans have argued that they have already made their one concession on tax revenue in the fiscal cliff deal, which avoided big tax increases on the middle class. They want further budget savings to come solely from spending cuts, especially for expensive benefit programs such as Medicare, Medicaid and Social Security.
The fiscal cliff deal also delayed the launch of the automatic sequester cuts until March 1, reducing them to about $85 billion for the remainder of fiscal 2013.
Failure to find replacement savings by the March 1 deadline is not expected to spark a financial crisis because the cuts, split evenly between military and domestic programs, would start to bite gradually.
But they are already having some effects. The Pentagon announced last week that it had begun laying off most of its 46,000 temporary and term employees and was cutting maintenance on ships and aircraft to slow spending.
Many in Washington seem resigned to their launch.
Paul Ryan, the influential House Budget Committee chairman and the 2012 Republican vice presidential candidate, said on Sunday that he thinks "sequester is going to happen."
He blamed Senate Democratic opposition to legislation passed by House Republicans to replace the automatic cuts with deep cuts to programs that aid the poor while sparing military spending.
Democrats counter that the problem is Republican resistance to additional tax revenue.
"I think that if we are going to have any substitute for sequester, it is going to have to include revenue, so that may explain why Mr. Ryan and others are saying it's inevitable to go to sequester," Democratic Senator Richard Durbin of Illinois said.
A senior Democratic aide on Tuesday also predicted that the automatic spending cuts would occur. "It is unlikely we do anything to prevent the sequestration before it kicks in," said the aide, who asked not to be identified.
The aide added that it was unclear how long they would remain in effect. That would depend on whether lawmakers use upcoming budget and appropriations battles to try to cancel the cuts or substitute something else for them. The aide added that the White House will soon begin laying out in great detail the effects of the automatic spending cuts.
Budget tensions recently eased a bit after House Republicans opted against waging another immediate battle over raising the $16.4 trillion U.S. debt limit.
Rather than using the borrowing cap as a lever to demand deep spending cuts, they have approved an extension in U.S. borrowing authority until May 19. The Senate is expected to pass the measure this week.
The reprieve was aimed at pressing the Senate to pass a budget this year and fostering a debate over a return to a more sustainable fiscal path without risking a default crisis.