PROVIDENCE -- The House of Representatives approved a 2007-08 budget early this morning following a marathon session that spanned more than 11 hours.

There were few surprises, but plenty of political posturing and emotional debate before exhausted lawmakers approved a $6.99 billion spending plan at 1:34 a.m. that froze state education aid, closed a series of corporate tax shelters, knocked an estimated 2,400 children off state subsidized childcare, agreed to allow Sunday auto sales, dedicated millions from the sale of tobacco-settlement bonds to balance the budget and required that 17-year-olds be tried as adults for criminal offenses.

The Senate will take up the budget next week. No changes are expected, according to Senate Finance Chairman Stephen D. Alves, D-West Warwick.

Journal photo / Ruben W. Perez House Speaker William Murphy listens to House Labor Committee Chairman Arthur Corvese last night.

The budget passed this morning largely mirrors the spending plan passed last week by the House Finance Committee -- with one exception.

Democrats fought through Republican outrage to pass an amendment that limits the governor’s ability to privatize state services. The move comes about a week after Governor Carcieri, a Republican, released a plan to lay off 1,000 state workers and expand efforts to replace union employees with private workers.

Governor Carcieri’s spokesman characterized the privatization effort as “nothing more than a blatant giveaway to the state employee unions.”

The governor wasn’t happy with the other provisions either. The Democrat-led House did not provide any additional education aid. The capital gains tax phase-out was frozen at 1.67 percent. And lawmakers did vote to use $154 million in tobacco settlement bonds to balance the budget.

“It appears that the House [passed] a budget that will be a disaster for Rhode Island taxpayers, businesses and local schools,” Carcieri spokesman Jeff Neal said late last night. “Unless this budget dramatically changes before passage by the Senate, the governor would have no choice but to veto.”

The passionate debate over education financing divided the House’s Democratic majority and forced lawmakers to go on record voting for a budget that gives cities and towns $19.4 million less than Carcieri proposed earlier in the year.

“I think I’m agreeing with a conservative Republican governor that we have to fund education,” said Steven F. Smith, D-Providence. “If we’re the school board for the state, we have to fund education properly; $19 million is not a lot of money in a $6-billion budget.”

The political implications of the school-aid vote were not lost on Republicans, who were a small but vocal presence last night, representing just 13 of 75 members.

“This is the showdown vote,” said House Minority Leader Robert A. Watson, R-East Greenwich. “If you vote for this article, you might be doing what the leadership in the chamber wants you to do. You decide. Are you with your community, or is your vote in this room?”

Smith, the president of the Providence Teachers Union, was among 12 Democrats who joined the 13 Republicans voting against level funding. Fifty Democrats, including House Speaker William J. Murphy, Majority Leader Gordon D. Fox, D-Providence, and House Finance Committee Chairman Steven M. Costantino, D-Providence, voted for the measure.

“There’s nothing to be embarrassed about,” Fox told those who voted yes. While lawmakers did not increase funding over last year’s amount, the state will distribute $864 million to communities next year, he noted. “That is providing aid,” Fox said, adding that “a message has to be sent” to local school committees to control spending.

And with virtually no debate, lawmakers approved, on a 48-to-19 vote, one of the more controversial proposals of the night: trying 17-year-olds as adults on all criminal charges.

“I understand that we must do this,” said Rep. Joseph S. Almeida, D-Providence, who ultimately voted against the change. But, he warned, time spent at the Adult Correctional Institutions “doesn’t correct anybody.”

While the vote represents a major policy shift, it was framed as a budget decision. The average annual cost of incarcerating someone at the ACI is about half the average cost of housing a youth at the Rhode Island Training School.

Starting July 1, 17-year-olds tried as adults, convicted of crimes and sentenced to probation, rather than prison time, will also fall under the Department of Corrections budget rather than the Department of Children, Youth and Families. All told, the changes are expected to save $3.6 million.

SOCIAL SERVICES

Lawmakers approved the social-services budget as proposed by House Finance last week, which restores some, but not all of Carcieri’s proposed cuts.

They made no changes to the structure of state’s cash assistance or subsidized health insurance programs, although changes in federal law to require increased documentation are expected to cause 5,750 people to lose their state-paid health coverage.

They maintained the so-called Independent Living Program, which provides services such as health insurance, college tuition payments and housing assistance to former foster children, but cut half of the program’s funding and told the state Department of Children, Youth and Families, which administers the program, to find a way to make it less expensive.

Lawmakers made two changes to the state’s subsidized child-care program. Together, the changes are expected to make 2,400 children ineligible for the program.

Legislators are lowering the upper age limit for the program from 16 to 13. House fiscal staff said about 300 children between ages 13 and 16 now qualify for state-subsidized care.

They are also lowering the income-eligibility threshold from 225 percent of the federal poverty level ($46,463 for a family of four) to 180 percent ($37,170). That change is expected to disqualify about 2,100 children.

A group of lawmakers, led by Rep. Grace Diaz, a Providence Democrat who has been a child-care provider in the past, tried to amend the budget to bring the rate back up to 225 percent.

“We’re talking about parents who work every day and pay their taxes,” said Rep. Joseph S. Almeida, D-Providence, who voted for Diaz’s amendment.

But the amendment ultimately failed.

Costantino noted that Carcieri proposed pushing the threshold down to 150 percent of poverty ($30,975 for a family of four), and lawmakers had to add in $7.6 million to bring it up to 180 percent. Diaz’s amendment would cost another $7 million, “which quite frankly, we do not have,” Costantino said.

“I don’t think there’s any question that child care…keeps people in their jobs,” he said. “At this point, we just can’t afford it.”

Journal photo / Ruben W. Perez House Finance Chairman Steven M. Costantino, right, chats with House Majority Leader Gordon Fox last night.

TAXES:

Lawmakers fought off a proposal to increase the long-term capital-gains tax to 5 percent.

It fell from 5 percent this year to 1.67 percent and was set to be phased out next year as part of the Assembly’s recent tax-reform package. House leaders supported freezing capital gains at the current 1.67-percent rate, but would go no further. Opposition came from Republicans — who fought anything but a phase-out — and a handful of Democrats, who saw an increase to 5 percent as a way to pay for education and social services.

“We have to give this at least a try to see if it works to see if we can get the kind of investment and job growth in this state that is severely lacking,” Costantino said of a reduced capital-gains tax, responding to a push by Rep. David Segal, D-Providence, to bump it up to 5 percent.

While the majority of Republicans joined the Democratic leadership against Segal’s proposal, one Republican broke ranks.

“Our mission is not to give breaks to people who can afford it,” said Rep. Joseph N. Amaral, R-Tiverton. “If we take the responsibility off our corporate citizens…then we’re transposing the tax burden onto our constituents, many of whom are working poor or ... senior citizens.”

The House also voted to close a series of tax shelters that would have cost the state more than $10 million next year.

The vote on the measure was largely split along party lines. House Republicans, like Carcieri, opposed changing the state’s corporate tax code, fearing that it would scare away business.

“One man’s loophole is another man’s incentive,” said Rep. Carol Mumford, R-Scituate. “And it’s an incentive to do business in Rhode Island.”

But Costantino said the perceived “loopholes” benefited large multi-state corporations above local business.

“Quite frankly, the small business community should be outraged,” Costantino said. “When large businesses have these kinds of issues, the tax burden gets put on residents and small business.”

An estimated 10 to 20 companies operating in Rhode Island — primarily large banks and major retailers — use loopholes to reduce their tax liability. The vote prevents companies from using real estate investment trusts and passive investment companies, which currently allow corporations to save by paying an out-of-state subsidiary to manage its property and “intangible assets” such as its own corporate logo.

Rep. Nicholas R. Gorham, R-Coventry, held a yo-yo to reinforce the point that lawmakers were inconsistent with their tax policy. “You know what we look like? A bunch of yo-yos,” he said.

SUNDAY AUTO SALES:

Lawmakers spent about an hour debating whether to allow car dealerships to open from noon to 6 p.m. on Sundays. Their ultimate verdict: yes.

The change is expected to produce tax revenue as people buy cars in Rhode Island on Sunday rather than cross the border into Massachusetts and pay sales tax there instead. “These are 20, 30, 40-thousand-dollar vehicles that we’re losing 5 percent on,” said Costantino.

The House defeated attempts by Republican representatives to kill the Sunday-sales provision and to add a sunset clause so the General Assembly would need to revisit the issue next year.

Dealership owners “work 14-hour days, 6 days a week,” said Mumford. “They need Sundays” for relaxation and family time, she said.

Mumford’s comments prompted Rep. Timothy A. Williamson, D-West Warwick, to comment that it was unusual to find Republicans sticking up for workers’ rights. “This must be bizarro world,” he said.

The length of debate on the issue prompted Minority Leader Watson to remark: “Mr. Speaker, when we’re done with the budget, we can leave here and buy a car, because it will be Sunday.”

TOBACCO:

Lawmakers voted to use $153 million from the sale of tobacco-settlement bonds to balance the budget, following the recommendation of the House Finance Committee.

In his original budget proposal, the governor outlined a plan to raise $160 million through the sale of the bonds, but suggested that revenue be used for capital improvements and transportation projects.

Watson, echoing the governor’s concerns, accused the Democratic majority of “squandering” the tobacco money. “These tough budgets are going to continue to come our way,” he said. “And guess what? The tobacco money is gone.”

Costantino blamed the Carcieri administration in part for the need to spend tobacco money on the operating budget.

He said that state departments overspent in the current fiscal year by $20 million. “That … overspending could have been the 3 percent for education.” The leadership has also cited the need to use tobacco money because an $80-million settlement from the insurance giant American International Group was tied up in litigation.

BLACKSTONE VALLEY COURTHOUSE:

The House approved a measure to pay $71 million for a new Blackstone Valley Courthouse.

The vast majority of the chamber voted for the proposal, but a vocal Republican minority sought to block the move.

John A. Savage, R-East Providence, tried and failed to eliminate the funding for the courthouse entirely.

“In this budget year, we can’t afford it,” Savage said. “It’s not the time. It’s not the place.”

Rep. Peter F. Kilmartin, D-Pawtucket, disagreed.

“If anything, it has positive impact. It’s something that’s necessary,” he said. “You can say we can’t afford it now. But when can we?”

The proposal would cost taxpayers $113 million over the next 20 years, beginning in 2009.

MOTOR VEHICLES:

Lawmakers increased registration fees for some types of vehicles and some types of license plates, but they maintained the same rate on the car-tax phase-out.

Starting July 1, Rhode Island residents will pay twice as much — $60 instead of $30 — to register their much-loved vanity plates. Knowing the fee hike might result in fewer people getting vanity plates, lawmakers did not budget for the revenue from vanity plates to double, instead estimating that 30 percent fewer people will choose vanity plates.

The state will also begin charging higher registration fees for heavier vehicles. Anything under 4,000 pounds will still be subject to the current annual fee of $30 (which translates into a $60 total bill when people renew every two years). For vehicles heavier than 4,000 pounds, the annual fee will range from $40 to $140.

Regarding the car tax, the first $6,000 of any car’s value will be exempt from taxation next year. Taxpayers’ actual bills will vary depending on the tax rate in the community where they live, but most taxpayers should see their bills go down as their cars depreciate and the same amount of value is exempted.

The General Assembly created the car-tax phase-out program in 1998, agreeing to reimburse cities and towns for some portion of cars’ value so the municipalities could phase out the tax without suffering from the lost revenue. Lawmakers originally envisioned the program exempting the first $1,500 of value in 2000, and gradually increasing that value through $15,000 in 2005 and then a car’s full value in 2006.

By the time the phase-out program took effect in 2000, lawmakers had already begun to tinker with the formula, lowering the exemption values for the out-years so just $9,400 would be exempt in 2005, and the full value would be exempt in 2007.

In 2002, they brought the exempt value up to $3,500 for the current year and $4,500 for the next year, but scrapped the out-years from the formula altogether. They increased the exemption to $5,000 in 2005 and $6,000 last year.

PRIVATIZATION:

The House passed a measure after midnight to limit the governor’s ability to privatize state services without legislative oversight.

In addition to disclosing plans to lay off 1,000 state workers, Carcieri last week said he would replace union employees with private workers for "every state service that could possibly be performed more efficiently by the private sector."

An article, introduced by Rep. Charlene M. Lima, D-Cranston, passed last night would set up a series of oversight provisions for the Department of Administration required “prior to the closure, consolidation or privatization of any state facility…”

Several fiscal analysis reports must be issued 60 days before bids are sought by the state.

“This amendment is essential if we are to stop scandals,” Lima said referring to governor’s use of private staffing firms.

The measure also gives competitors the right to appeal privatization decisions. And it gives the Assembly essentially a veto over any privatization plan.

The Assembly has “the right to review any final program decision…in the event that it believes that the public interest is sufficiently at risk.”

House Republicans were outraged that the proposal was even brought up in budget discussions last night. It was initially proposed as an individual bill and was set to be heard in committee next week.

“This is literally an 11th-hour power grab,” Watson said. “It’s the legislature trying to invade the executive branch.”

Mumford agreed: “We have a blatant giveaway to the state employee unions at the expense of the Rhode Island taxpayer.”

The party-line vote to pass the measure was 61 to 13.

DEPARTMENT REORGANIZATION

The House approved a major reorganization plan that would shift the oversight of the Traffic Tribunal, set uniform terms for all the magistrates, and assign the state Office of Health and Human Services to manage five state health agencies.

The office will lead the departments of children, youth and families, elderly affairs, health and human services, and mental health, retardation and hospitals. But coming fresh off a contentious debate over school funding, some of the Republican legislators went after the Health and Human Services by trying to cut the budget by 3 percent.

Republican Rep. Watson’s idea was heatedly shoved off by several Democrats.

The reorganization also lays out terms to create a new state Department of Public Safety by the next fiscal year that would include all of the state’s public safety agencies: the state police, the E-911 division, the state fire marshal, the Fire Safety Code Board of Appeal and Review, the justice commission, municipal police training academy, and the sheriffs and capitol police. The state police superintendent will be the director.

The plan would take effect as early as July 1, 2008, and no later than Jan. 1, 2009.

The article, which originated out of the House Finance Committee, is intended to save money by consolidating some services. While the new department didn’t attract much interest from the legislators last night, the fates of the 18 magistrates did, mildly.

This plan shuffles the eight-year-old Traffic Tribunal from under the oversight of the District Court chief judge to a chief magistrate – a new position – who will be appointed by the state Supreme Court chief justice. That magistrate will in turn appoint other magistrates to the Traffic Tribunal, eventually saving money instead of having judges, but not putting them through the same merit-selection process that judges face.

All new magistrates will have to be appointed by the top judges or magistrates in their division, undergo Senate confirmation, and serve 10-year terms. Right now, some serve 8 or 10 years, others are lifetime magistrates.

Rep. Donna Walsh, D-Charlestown, said she had “philosophical problems” with the magistrates, but she’d pursue that issue next year. Rep. Mumford suggested voting on the magistrates and Traffic Tribunal changes separately. “There’s quite a bit that needs to be reorganized in state government,” she said. “However, we have something that’s working well, and that’s the Traffic Tribunal.”

The majority voted for the new plan.

CABLE TV TAX:

The House declined to act on a proposal to impose a new tax on cable TV service, but said the idea might return next week in the form of a bill separate from the budget.

The proposed 3.5-percent tax would generate an estimated $7 million to $9 million for the state next year, but the state would parcel it out to municipalities proportionally based on population. According to a chart produced by the House, the City of Providence would get $1.5 million; East Greenwich would get $111,000.

Costantino said the new tax was conceived as part of a “municipal aid package” to help municipalities in other areas since they won’t be getting any increase in education aid from the state. The package of ideas also included prohibiting water authorities from charging cities and towns to use their systems, and allowing cities and towns to charge for the use of master box fire alarms.

All three ideas were meant to bring municipalities extra money without costing the state anything, but some lawmakers objected, saying the cost would be passed along to the taxpayers in the form of increased water rates and cable bills. Several said they wanted to see hard numbers on the impact to consumers before deciding.

House leaders withdrew the amendment because it was too controversial, but said they would consider it further next week.

Journal photo / Ruben W. Perez Rep. Nicholas Gorham expresses his displeasure with the budget.

UNLIKELY VICTORY:

Rep. Nicholas Gorham, R-Coventry, the perpetual thorn in the side of House Democrats, offered four amendments at the end of the night, prompting groans from his colleagues. At one point, Democrats cut Gorham off mid-sentence with a procedural motion to kill his amendment, which would have given the governor the power of line-item veto on the budget.

“I haven’t even finished the description!” Gorham protested.

But in the end, the House did adopt one of Gorham’s ideas. That amendment, the “farm to school income tax credit,” creates a tax incentive to encourage schools to buy locally grown produce and other Rhode Island farm products.