March 14 (Bloomberg) -- New York Lieutenant Governor David Paterson, who takes over the state's top job when Eliot Spitzer steps down next week, refused to rule out an increase in personal income taxes for top earners as the economy slows and revenue dwindles.

``We have a huge economic problem in this country,'' Paterson, 53, said yesterday in Albany at his first news conference since Spitzer announced plans to resign effective March 17 amid allegations of involvement in a prostitution ring.

While Paterson said he backed Spitzer's pledge not to raise state taxes, an increase in the top rate for those earning more than $1 million ``might become an issue, but I'm hoping it won't be,'' he said.

State officials reduced their forecast for next year's tax collections by $634 million since Spitzer presented his $124.3 billion budget in January with a pledge not to raise taxes. Economic prospects are worsening amid $188 billion of credit losses and asset writedowns at banks and securities firms. Wall Street firms and their employees pay a fifth of state taxes.

With the end of the state's fiscal year 17 days away, the Democrat and former state senator from Manhattan said he will work on the budget this weekend before taking the oath of office. Accepting a proposal from the Democratic-led Assembly to increase the personal income tax, would put Paterson in conflict with Senate Majority Leader Joseph Bruno, a Republican from Brunswick.

Republican Response

``Senate Republicans will not be a party to such a massive new tax increase in this, or any other state budget,'' Bruno said this month. Higher taxes would ``drive even more New Yorkers out of their homes and out of this state,'' he said.

Bruno, 78, will be next line of succession if Paterson becomes incapacitated or leaves the state.

The majority leader is under investigation for his possible role in steering union pension funds to an investment firm that employed him, the New York Times has reported. Bruno has denied wrongdoing. Requests seeking comment from the senator or his representatives went unanswered.

The Senate under Bruno is investigating the use of state police by Spitzer aides to compile records on the majority leader's use of state-owned aircraft. Spitzer denied knowledge of the efforts and wasn't formally accused of wrongdoing. The incident began a slide in his public approval ratings that continued to drop until his resignation.

Paterson Transition

Paterson, who is legally blind and would be the state's first African-American governor, enters the budget fray while making the transition from an official with a staff of less than 20 to the chief executive of a state with a population of more than 19 million.

It's too soon to know what his positions would be in the state's annual budget battle, including the tax increase, said Richard Brodsky, a Democratic assemblyman.

``His instincts will be to stop piling fees, tolls and taxes on the back of the middle class,'' said Brodsky, whose district is in Westchester County, near New York City.

Paterson has a reputation for being more willing to compromise than Spitzer, meaning his administration may bring ``an end to the confrontational, ridicule and contempt style of government,'' Brodsky said.

``There is just a harsh reality that the numbers are not about to turn around and get better,'' Thomas DiNapoli, New York State Comptroller, said in an interview with Bloomberg Radio. ``That is going to, I think, put a lot pressure on to get it done because the news is only going to get worse after April 1,'' he said.

Budget Priority

Paterson described his priority as passing a budget ``in a way that is commensurate with the tremendous economic hardships that our budget has experienced, and at the same time recognize that there are people out there with families, and people out there with needs, and try to balance all that.''

The Spitzer administration proposed to close a $4.4 billion gap between spending and revenue for the fiscal year that begins April 1 by cutting health-care spending, reducing growth in aid to local school districts and increasing fees. The budget would increase spending overall by 5 percent.

The Assembly wants more spending, and said the way to pay for it would be by increasing the top personal income tax rate to 7.7 percent from 6.85 percent.

``The five-year tax hike would raise $1.5 billion annually and affect about 70,000 tax filers,'' said Dan Weiller, a spokesman for the Assembly.

The Senate's budget plan calls for spending $13 million less than what Spitzer proposed. It would increase aid to local school districts, restore cuts in health-care spending and eliminate fee increases, while saving $300 million through an across-the-board 3 percent spending cut at state agencies and $600 million with other spending cuts spread across state government.

The Senate also wants a constitutional cap on spending increases to the lower of 4 percent or 120 percent of the rise in a consumer price index. The senate plan for next year wouldn't meet the spending cap because the start of the fiscal year is two weeks away and ``the governor's plan already had so much growth in it'' said Jeffrey Lovell, secretary to the Senate Finance Committee.

To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net

Last Updated: March 14, 2008 00:01 EDT