PROVIDENCE –– After hours of intense debate, the House of Representatives late Wednesday night was poised to approve a state spending plan that will wipe out millions of dollars to cities and towns, narrow pension benefits for thousands of state workers and teachers, and boost Rhode Island’s gasoline tax by 2 cents per gallon.

Forced to close the largest budget deficit in recent memory — a $590-million gap — lawmakers could have done far more to taxpayers and those who rely on subsidized human service programs, but thanks, in part to a heavy reliance on federal stimulus dollars, there were no sales tax or income tax increases.

Legislators were also set to repeal one tax break for high earners, but leave another one untouched. And they restored looming cuts to prescription drug programs for seniors and subsidized dental coverage.

But Democratic leaders met heavy resistance from anxious lawmakers on cuts to municipalities and pension changes, among other issues.

“This is a time for profiles in courage,” said House Majority Leader Gordon D. Fox, during a heated pension discussion. “Any of you who feel you can’t make these decisions, get up and leave. You’re here to be leaders.”

The House debate on the $7.76-billion state budget for the fiscal year that begins July 1 will culminate in passage of the General Assembly’s most significant legislation this year. It would increase overall spending by 12 percent –– including $226.5 million in federal stimulus dollars — compared with the state budget adopted last June. The state-only portion dropped 10 percent, to $2.98 billion.

The Senate, which is scheduled to vote on the plan as early as Thursday, does not traditionally change the budget bill.

While the exhaustive discussion covered dozens of contentious issues over more than eight hours, most had been decided by Democratic leadership before the session began.

At the outset, House Finance Committee Chairman Steven M. Costantino announced he had scrapped a previous proposal to eliminate the Office of the Health Insurance Commissioner. He also said that charter schools would receive $1.5 million in new funding, a move strongly opposed by organized labor.

“No one likes to lose,” said Robert A. Walsh, executive director of National Education Association Rhode Island, acknowledging that labor unions probably failed to persuade lawmakers to support each of their budget priorities. “This has been a disappointing budget process to say the least.”

In addition to charter schools and pensions, organized labor was the driving force to repeal, or freeze, the alternative flat tax to produce tens of millions of dollars for cities and towns. While a handful of mayors lashed out in recent days against the plan to cut $55 million from the general revenue sharing program, most had silently accepted the cut that was largely expected.

Freshman Rep. Scott J. Guthrie, D-Coventry, led a charge to restore funding for cash-strapped cities and towns. To do so, he suggested freezing the phase-out of the alternative flat tax, a tax break that benefited 2,267 high earners in 2007, according to the state Division of Taxation.

House lawmakers ultimately voted to keep the high-profile tax break that allows high-income earners to forgo deductions, exemptions and credits in favor of a single flat-tax rate. But before the vote came what some described as the toughest debate of the night.

In tax year 2009, the flat-tax rate is scheduled to drop from 7 to 6.5 percent. If frozen at the current rate, the state could hold onto $12.2 million in tax revenue it would otherwise lose, according to the State Budget Office.

“I don’t want to soak the rich ...,” Guthrie told fellow lawmakers. “I am asking them to sacrifice a little bit, like we have to sacrifice.”

“Politics is local. Don’t forget.” Guthrie continued. “I can go back to Coventry and say I fought for you ... I hope you can go back to your communities and say you fought for them, too.”

But Costantino said Rhode Island needs the flat-tax option to be competitive with its neighbors.He called the flat-tax vote a “litmus test on where we want this state to go.”

PENSIONS

Despite threats of lawsuits by the teachers unions, the House endorsed a slate of pension cuts aimed at shaving a total of $55 million off the soaring taxpayer cost of providing pensions to more than 26,000 public school teachers and state employees, including new judges.

The final vote for the package was 50-to-24.

For reasons that remain largely unexplained, Costantino introduced — and won support — for a last-minute amendment exempting District Court judges from the new curbs the budget seeks to place on the pensions available to judges hired after July 1. When asked the reason, Costantino said: “They are in a different statute.”

At present, Governor Carcieri is evaluating five nominees for chief judge of the District Court, a list that includes four current judges, including Jeanne E. LaFazia, the wife of the chief of staff to the Senate majority leader, and Carcieri’s own chief of staff, Brian Stern.

The package does not go as far or save as much money as plans proposed by either Governor Carcieri or a House study commission.

And none of the changes would apply to anyone already eligible to retire on Sept. 30.

But for others, the new rules governing age for retirement, benefit accrual rates and annual cost-of-living increases would take effect Oct. 1.

Under the new rules, the state would adopt age 62 as the new “target” age for retirement. It is a hugely complicated formula, but simply put: the further away from retirement the employee is, the higher the age requirement.

For example, a state employee who started work at age 25 who could retire today at age 53, would have to wait until age 53 and three months.

The new plan would also key pension calculations — now based on a three-year salary average — to a worker’s highest five-year salary average.

In one vote after another, the House rebuffed attempts to stretch the retirement age to 65, or avert any of the pension cutbacks by reamortizing the state’s pension debt, to avoid having to make any cuts now by stretching out the payments.

House leaders objected strenuously to both, with House Majority Leader Fox delivering an impassioned speech urging the rank-and-file to support the plan, “Now is the time for you to be profiles in courage, not to placate who is going to be supporting me with a campaign check in the next election…”

TAXES AND FEES

While the flat tax appears to have been preserved, the budget eliminates preferential treatment for taxpayers who profit from the sale of stocks, bonds and other such investments.

Lawmakers were also likely to reject Carcieri’s plans to cut the state’s corporate income tax. But they appear to have increased the exemption of estates subject to Rhode Island’s estate tax to $850,000, a number that would be adjusted in accordance with the consumer price index each year.

Lawmakers also were poised to endorse something dubbed the “Amazon tax,” which would require residents to pay taxes on some Internet purchases, if the purchaser is referred by a local Web site. On fees, lawmakers were set to impose a $100 processing charge for people seeking to expunge their criminal records. Another change would double the price of recreational-vehicle beach permits to $100 for residents and $200 for nonresidents, and triple the cost of dock permits for oceanfront property owners to $1,500.

•The House restored $700,000 to run the Office of the Health Insurance Commissioner, Chris Koller, the man currently overseeing health insurers’ requests for double-digit rate increases.

Legislative leaders, who initially planned to eliminate the office, changed their minds in recent days following a flurry of opposition.

“Upon reflection I think the House Finance Committee recognized there was a significant amount of public support on the issue,” Koller said. In restoring his office, the legislature called for a greater degree of accountability, a move Koller said he supports.

•Lawmakers voted, with very little debate, a plan to give Rhode Island’s school districts roughly the same amount of state aid through a complicated formula involving heavy reliance on stimulus funds and future pension changes.

The biggest loss for schools is the elimination of $6.3 million in professional development money –– the state’s entire contribution for that purpose –– used to help teachers and educators improve their skills.

Meanwhile, the House was poised to restore $1.5 million for two new charter schools. The funds would help create the Rhode Island’s first new charter schools in five years, a middle school in Central Falls and the controversial “mayoral academy,” in Cumberland, a school which would be free from certain union previsions.

speoples@projo.com