WASHINGTON (Reuters) - President Barack Obama's proposal to revive the popular Build America Bonds (BABs) moved one step closer to legislative reality on Wednesday with introduction of a bill to continue the program for two years.

California Democrat Adam Schiff entered the bill in the House of Representatives to extend the taxable bond program which expired on December 31 until the end of 2012. The bill would also lower the federal rebate BABs pay issuers.

Created in the 2009 economic stimulus plan, BABs proved a popular source of credit for states and local governments after the municipal bond market froze in late 2008. Republican critics say BABs send tax dollars to states that do not budget well and have vowed to block their revival.

The bonds previously paid issuers federal rebates equal to 35 percent of interest costs. Schiff's bill would lower that subsidy to 28 percent.

In the budget Obama proposed on Monday he suggested reviving the program with a 28 percent rebate.

"Extending the popular program for another two years and expanding the number of eligible organizations that can use these bonds to fund projects will provide a much-needed boost to the hard-hit construction industry in California and throughout the nation," said Schiff, noting his state sold nearly a quarter of all BABs.

Last week, fellow Democrat Rep. Gerald Connolly put forth a plan to bring BABs back for two years in which they would pay rebates equal to 32 percent of interest in 2011 and 31 percent in 2012.

While Schiff's plan will likely receive encouragement from the White House and Democratic lawmakers, it will face an uphill battle in Congress.

Republicans were able to block attempts in Congress in December to extend the program, and will likely oppose any new moves after they took control of the House in November's elections on promises to slash spending.

"The Build America Bonds thing, my gosh, why we have the rest of the country pay for profligacy on a couple states, it just won't get their spending under control," said Orrin Hatch, the most powerful Republican on the Senate Finance Committee, during a hearing on Obama's budget with Treasury Secretary Timothy Geithner.

States, cities and other muni issuers sold $116.3 billion of BABs in 2010, accounting for more than a quarter of all new debt they issued last year.

In the Senate, Democrat Ron Wyden is gauging support for an attempted rebranding of the program. In the House the Republican chairman of the Transportation Committee, John Mica, has said he may reincarnate BABs in a bill to pay for roads.

As Geithner has met with lawmakers at the Capitol this week on Obama's budget, Democrats in both chambers voiced support for continuing BABs, with California's Mike Thompson saying at a Tuesday hearing they were "so successful."

"I know Sacramento Airport used those. They generated 1,250 jobs, and probably every district across the country can say something similar," he said.

(Reporting by Lisa Lambert and Donna Smith, additional reporting by Kim Dixon; Editing by Andrew Hay)