PROVIDENCE – After hours of debate, the House of Representatives early this morning approved a $7.76 billion 2010 state budget proposal by a wide margin.

The budget was approved by a veto-proof margin of 69-to-5. The tax-and-spending plan will now move to the Senate, which is expected to take it up this afternoon.

“This has been an extraordinarily difficult budget addressing extraordinarily difficult circumstances,” House Finance Committee Chairman Steven M. Costantino, D-Providence, said in a statement. “This budget is fair and represents across-the-board sacrifices so we can continue to operate the most important functions of state government in the face of shrinking state revenues.”

Among the changes made yesterday were the restoration of R.I. Health Insurance Commissioner Christopher Koller’s job and a $2 million appropriation for the R.I. Economic Development Corporation.

The budget also includes a 2-cent increase in the gasoline tax, with the additional money going to the R.I. Public Transit Authority, and an end to preferential tax treatment of long-term capital gains. It also raises the estate tax exemption to $850,000 from its current level of $675,000, and indexes the exemption to inflation.

The House rejected by 52-to-23 an amendment to freeze at its current level the state’s controversial alternative flat tax for the wealthy.

The House measure reduces state offices’ budgets for next year by a combined $58 million. Lawmakers have suggested the Carcieri administration should leave vacant positions unfilled in order to achieve the savings.

Costantino announced the revisions affecting the Office of Health Insurance Commissioner and the EDC before the start of the floor debate on those and other changes to the budget passed by his committee last week.

Larry Berman, spokesman for the House Democratic leadership, said Costantino made the changes to avoid lengthy discussion on amendments that the leadership supported.

Instead, the early debate focused on proposed amendments of the state’s alternative flat tax, which is used by high-wage earners to avoid paying the top income tax. House leadership opposed changing the tax and it remained in the 2010 budget plan approved by the House Finance Committee last week.

With the state grappling with a projected $586.6 million shortfall in fiscal 2010 – which starts July 1 – the flat tax has become a controversial topic. Supporters of the tax, including local business leaders, have argued that it helps attract new businesses and their wealthy decision-makers to Rhode Island. Critics say the tax only benefits a small number of rich people to the detriment of the majority of taxpayers.

The flat-tax amendment that failed was introduced by Rep. Scott J. Guthrie, D-Coventry. It would have frozen the flat tax at 7 percent instead of dropping it to 6.5 percent in tax year 2009 as scheduled. The rate is scheduled to fall to 6 percent next year.

Guthrie and other liberal legislators proposed using the proceeds from freezing the flat tax to restore revenue sharing with municipalities. That program was eliminated to cut $55 million from the final budget.

The decision to restore $650,000 for Koller’s office follows a week in which Republican Gov. Donald L. Carcieri and Democratic Lt. Gov. Elizabeth H. Roberts publicly opposed the House Finance Committee’s decision to eliminate the office.

While restoring $2 million to the state appropriation for the EDC, the appropriation would still fall about $600,000 short of what Carcieri had recommended in his budget package.

The governor had proposed giving the agency slightly more than $6 million, while the House budget now calls for the EDC to receive $5.5 million.

House Democrats also restored funding that Carcieri proposed eliminating for subsidized prescription drugs for the elderly and disabled, and welfare and dental benefits for the poor.

The budget also includes changes to retirement benefits for state employees and teachers.

Starting Oct. 1, the date when current workers would become eligible to retire would vary based on their age and length of service. New workers would have to be at least 62 years old to retire. The value of their pensions would now be based on their average salary in their five highest-paid years, rather than three.

New judges would receive maximum pensions worth 65 to 80 percent of the average salary in their five highest-paid years, rather than 100 percent.