The bill also aims to increase harm prevention measures and to increase the amount of money returned to communities which host pokie machines.
The gaming trusts which distribute grants have been organising meetings and started an online campaign seeking support to overturn Mr Flavell's bill.
The campaign included a website, barthebill.co.nz, created by Pub Charity Incorporated and emails from the Lion Foundation urging opposition.
Problem Gambling Foundation chief executive Graeme Ramsey said he had complained about money being spent by the trusts on opposing the bill.
He said the rules, governed by the department, stipulated pokie proceeds should be spent on reasonable and necessary purposes.
"It is very questionable as to whether this meets that purpose," Mr Ramsey said.
He said the gaming sector was rallying because the bill "absolutely threatens their survival".
"Turkeys don't vote for Christmas," he said. "They are running seminars and encouraging grant recipients all over the country to put in submissions against it."
Green Party spokeswoman on gambling Denise Roche accused gaming trusts of bullying community groups to put in submissions.
She said she knew of one group which had been told by four different funding bodies in one week to put in a submission.
The submissions were publicly declared and would allow gaming trusts to see who had opposed the bill.
Mr Flavell said he drafted the bill because of the negative effects gambling had on Maori, Pacific and lower socio-economic communities.
He said it had also become clear the gaming trust system was flawed.
"Some of the trusts are straight out and out rorting the system. There are a number of trusts getting away with murder."
Mr Flavell said he was concerned opponents of the bill had made statements which he believed were untrue. "Scaremongering" was counter-productive to the debate around pokie trusts which the public needed to have.
He said he knew of senior Cabinet ministers being approached by the gaming sector and told of flaws in his bill.
He expected the bill to go through changes as part of the select committee process, under which the public would have the opportunity to debate pokie machines, their proceeds and how they were distributed.
Pub Charity Incorporated chief executive Martin Cheer said the industry needed to be vocal in its opposition to the bill, which he believed was flawed.
"To say 'here's some legislation that says we're all a bunch of crooks and should be dismantled' and do nothing is a bit naive. We have got something to say about the bill and our perspective on it," Mr Cheer said.
"These are people who would be talking about it anyway."
He said estimates of harm caused by the machines was overstated.
"My suggestion [to] anyone who has a moral problem with our machines is don't apply for the funds."
WHAT'S GOT THEM WORRIED
What is it?
The Gambling (Gambling Harm Reduction) Amendment Bill, drafted by Maori Party MP Te Ururoa Flavell.
What does the bill aim to do?
Strip power from the large gaming trusts which dominate the $700 million pokie industry in pubs and clubs.
How?
The power to distribute the $300 million available to community groups would be put in the hands of local authorities, wiping out the present funding bodies.
