Rep. Scott Guthrie, left, chatting with Rep. Gregory Schadone in the House lounge Tuesday, proposes eliminating or freezing the flat-tax alternative, which he calls a “giveaway” to the rich.

The Providence Journal / Connie Grosch

PROVIDENCE –– Few battles are expected to be more intense in the state House of Representatives than the one Wednesday afternoon over a move to kill the flat tax.

The dispute has drawn the interest of a host of powerful players –– labor unions, mayors, and a coalition of elected officials –– who hope to repeal the high-profile tax break that benefits 2,267 Rhode Island taxpayers. Supporters want to funnel the savings to the cash-strapped cities and towns, which are slated to lose more than $55 million in state aid for the budget year that begins in seven days.

The stakes are high for Rhode Island’s taxpayers and its legislators, who must vote Wednesday on a $7.76-billion budget plan to close the largest budget hole in decades.

“Careers in this room will be decided on this budget,” said freshman Rep. Scott J. Guthrie, D-Coventry, sitting in a near-empty House chamber on the eve of Wednesday’s debate. “If you don’t stand up for your locals, people don’t forget.”

The budget plan for fiscal 2010 that was endorsed last week by the House Finance Committee –– the result of weeks of closed-door negotiations between the House and Senate –– effectively eliminates the revenue sharing program created two decades ago to help control local property tax rates.

It is by no means the only controversial issue to be decided in the budget debate set for 2 p.m. A handful of issues are “in play,” according to House Finance Committee Chairman Steven M. Costantino, including plans to eliminate the Office of the Health Insurance Commissioner, cut in half the budget of Rhode Island Economic Development Corporation, and block new funds for charter school expansion.

Wednesday’s vote is likely the most significant step in what is the General Assembly’s most significant piece of legislation this year. While the tax-and-spending plan won’t become law without Senate approval, the Senate does not traditionally change the budget bill.

Guthrie plans to introduce three budget amendments –– about 125 have been drafted on various issues –– that would divert millions of dollars to cities and towns, some of which are planning substantial property tax increases and service reductions to balance budget holes of their own.

To restore municipal assistance, Guthrie proposes to eliminate, or freeze at its current level, Rhode Island’s flat tax alternative, a tax break for high earners adopted in 2006. It essentially gives taxpayers the option to use a single tax rate, instead of a range of rates, to calculate their individual Rhode Island income tax.

“It’s a money giveaway. Nothing less,” Guthrie said.

The finance chairmen in the House and Senate oppose Guthrie’s plans, according to separate interviews Tuesday. But the final decision on the budget plan that begins July 1 will ultimately fall to the rank-and-file members.

Twenty-four hours before the House vote, municipal officials were oddly hushed, as if resigned to the elimination of funds they have labored hard in the past to preserve.

The exception was North Providence Mayor Charles A. Lombardi, who planned a news conference Wednesday morning in protest. When his town’s property tax bills are mailed out next month, he plans to include the names of every North Providence lawmaker to remind residents who he blames.

“What I’m going to say is, ‘We did not get the help we were seeking from the General Assembly to help manage our town and now we’re looking at a significant tax increase,’” Lombardi said.

Costantino showed little sympathy.

“We gave cities and towns so much advance on this … There is no excuse for them to have budgeted money that they were told would probably not be in the [state] budget,” he said. “And it seems that [organized] labor’s been harder on local aid than the mayors and the administrators.”

Indeed, the state’s largest public employees union, Council 94 of the American Federation of State, County and Municipal Employees, distributed personalized letters to lawmakers Tuesday urging them to “restore aid to cities and towns by supporting the repeal or freeze of the alternative flat tax.”

And Ocean State Action, a coalition of advocacy organizations and labor unions, passed out detailed lists of flat-tax beneficiaries by municipality.

Of the 2,267 taxpayers who filed for the flat-tax alternative for tax year 2007, a total of 838 were Rhode Island residents, according to information provided by the state Division of Taxation.

There were 64 in Barrington, for example, out of 8,032 total filers.

The state will forgo an estimated $34.7 million in tax revenue next year because of the flat-tax option, according to an analysis by the State Budget Office.

In tax year 2009, the rate is scheduled to drop from 7 to 6.5 percent. If frozen at the current rate, the state could recover $12.2 million in tax revenue for the coming fiscal year, according to the governor’s budget office.

Either move would hurt the state’s economy, according to John Simmons, executive director of the business-backed Rhode Island Public Expenditure Council.

“It will have a real negative effect on capital formation in Rhode Island,” Simmons said. “People will leave.”

speoples@projo.com