ALBANY -- Gov. Eliot Spitzer proposed a $124.3 billion budget to the Legislature on Tuesday that would hold spending growth to about 5 percent, the lowest increase since the mid-1990s.

The proposal would close a $4.4 billion deficit and address declining growth in revenues caused by a slowing economy. Spitzer's address came on a day Wall Street and world markets were taking hard hits amid growing fear of a national recession.

"These challenging economic times require us to make tough, but necessary choices and set clear priorities for state spending," Spitzer said.

He said that if the state can stick to increases of about 5.3 percent in spending long term, the revenues from good times will pay for the deficits in the bad times.

To do it, Spitzer proposes a combination of reducing spending increases for education, $1 billion in health care cuts, delaying part of promised property tax relief, and increasing various fees. He also proposed unconventional measures such as redefining "little cigars" and malt liquor to generate more tax revenue and creating a "tax stamp" on illegal drugs, to be paid after convictions.

Taxes or loop-hole closers?

Spitzer, however, insists actions like these and a proposal to force Internet giants like Amazon.com to collect state sales taxes on purchases aren't tax increases. Instead, he called them loophole closers and fee increases because they don't touch "broad-based taxes" like those on income and retail sales.

His spending increases would include $400 million more to pay for upstate economic programs and to provide health care for 400,000 uninsured children; free public college tuition for combat veterans returning from Iraq and Afghanistan; statewide broadband Internet serservice; and affordable housing credits in the New York City area.

"We will be more efficient," Spitzer said in proposing $2.3 billion in savings. "We will examine our own house, the way businesses do."

Spitzer's proposed 2008-09 budget would include $81.8 billion in state spending alone, before federal aid is included. The current budget increased spending nearly 8 percent over the 2006-07 budget and recent years' budgets, by the time they were adopted by the Legislature, swelled to about 10 percent annually.

For New York City, Spitzer proposes a 7.3 percent increase in school aid worth $547 million; a 1.4 percent decrease in property tax aid worth $18.7 million; a huge increase in municipal aid to $143 million; and $40 million to improve and repair parks.

The city will also get millions less than the $1.25 billion promised in a multiyear plan. Spitzer says the shortfall will be made up in subsequent years.

Statewide, school districts would receive an average increase of 7.5 percent as part of a $1.46 billion increase statewide, to $21 billion in school aid.

Long Island schools, most represented by members of the Senate's Republican majority, will see an annual increase in aid of about 8 percent, less than the 12 percent they expected.

The school aid and reduced spending proposals are expected to set up fights this election year with the Senate and the Democrat-controlled Assembly. Spitzer said he told lawmakers he expects them to balance any additional spending with equal cuts or revenue, but the he won't draw "a line in the sand" by threatening vetoes now.