While local business leaders, top, listen to Governor Carcieri express his opposition to proposals intended to boost tax revenue in order to deal with the looming state budget deficit, those opposed to cutting back on social program like the Head Start program in order to close the fiscal gap rally in the State House rotunda, above.

The Providence Journal / Kathy Borchers

PROVIDENCE –– The advocates flooded the State House hallways, staircases and committee rooms yesterday, fighting on the same afternoon for competing priorities as lawmakers decide how to close the largest state budget deficit in nearly two decades.

The army of protesters included poor children, business leaders, advocates for the homeless and taxpayer groups. At one point there were three rallies running simultaneously and two groups jockeyed for use of the microphone and podium in the State House rotunda.

Most were drawn to Smith Hill yesterday by a sweeping tax proposal introduced by Rep. Arthur Handy, D-Cranston, that leaders of his own party did not support. But the battle that played out in the capital building’s marble halls was bigger than one lawmaker’s tax plan.

The General Assembly must decide a key question in the coming months: Should government raise taxes to help close the $384-million budget hole or rely solely on cutting government spending?

Close to 140 witnesses signed up to testify on Handy’s bill during a House Finance Committee hearing that stretched late into the night.

Earlier in the day, protesters from the Campaign for Rhode Island’s Priorities, a collection of poverty and labor advocates, battled the Rhode Islanders Against Excessive Taxation for attention in dueling rallies in the rotunda. At the same time, Governor Carcieri met with business leaders in the State Room upstairs.

The governor blasted Handy’s bill, which would roll back tax cuts for high earners and expand the sales tax to include health-club memberships, expensive clothing, landscaping and legal services, among other things.

“All they’re doing is taxing just about everything that moves,” Carcieri said. “We are at an axis point right now –– either we decide to solve this problem by tightening our belts … or we are going to raise taxes.”

The Republican governor released a spending plan for 2008-09 that avoided tax increases, although some groups, such as hospitals, complained there are substantial fee hikes. Instead, the governor balanced the massive budget gap by cutting state spending on personnel, state aid, and human-service programs such as subsidized health care and long-term care for the elderly and disabled.

Early indications are that the Assembly’s Democratic leadership agrees with the governor’s priorities more than they disagree.

“Ultimately, I remain committed, as is the speaker, that we are not looking at any broad-base tax increases; we’re not looking to roll back anything at this point,” said House Majority Leader Gordon D. Fox, D-Providence. “And I want to assure those folks that that’s where our hearts and minds are right now.”

Handy acknowledged the likelihood that his bill would not become law this year, but said it was important to get the discussion going. “We need to restructure the tax system. In my mind, it’s broken,” he said.

Advocates for human-service programs, which face deep cuts, argued against the tax breaks for the wealthy, which disproportionately favor high earners.

An estimated 350 protesters gathered in the State House earlier in the day to protest Carcieri’s plan to cut state spending on Head Start. The move would save taxpayers $3.3 million and force 400 poor children out of the preschool program that currently serves 2,800.

“Rhode Island’s children are not someone else’s responsibility. They are our children,” said the Rev. Donald C. Anderson, the executive minister for the Rhode Island State Council of Churches. “Keeping 400 children in Head Start is the good and right thing to do.”

Later, Carcieri dismissed Mr. Anderson’s concerns.

“Show me empirical evidence that Head Start has done anything,” he said. “I think it’s been the biggest waste of money, frankly.”

One of the Head Start protesters, however, said he’d have to leave his construction job if Head Start didn’t care for his 4-year-old son every day from 9 a.m. to 1 p.m.

“If I don’t have child-care, I can’t work and I can’t pay taxes,” said Marcos Vazquez, 21, of Woonsocket.

An effort to study the state’s current tax code and potential reforms is under way at the Department of Revenue, where the governor’s newly appointed director, Gary Sasse, is preparing a “strategic tax plan” to present to state leaders by the end of the calendar year.

The business-backed Rhode Island Public Expenditure Council urged caution in adopting any major changes to the state’s tax code, according to a statement issued this week: “Without knowing the true impact of the legislation, and given the state’s already significant tax burden, a more prudent course of action would be to exercise caution and continue with the positive steps the state has already made.”

Rhode Island’s tax burden ranks seventh-highest in the nation, based on a RIPEC analysis of tax collections for fiscal year 2005. The average Rhode Island taxpayer contributes 12.3 percent of his or her personal earnings to state income, property and sales taxes.

Connecticut stands at 11th-highest, at 11.9 percent of personal income; Massachusetts ranks 34th at 10.7 percent.

Rhode Island hasn’t raised its income or sales taxes –– the state’s first and second largest revenue streams respectively –– in more than 15 years, according to Sasse.

But the Assembly has approved policies in recent years that lower taxes for higher earners.

The capital gains tax phase out that took effect in 2006 dropped from 5 percent to 1.67 percent this year, which cost the state $46 million this fiscal year and an estimated $48 million next year, according to Sasse.

Similarly, the alternative flat tax, adopted by the General Assembly in 2006, will cost the state $14.1 million this fiscal year and an estimated $24 million next year.

With reports from Cynthia Needham

speoples@projo.com