New York State must contain spending, reduce taxes, and trim other infamously high business costs in to help the state's small businesses survive and prosper, two top candidates for the Republican nomination for governor told small business leaders at The Business Council's annual Small Business Day Tuesday.

But just after former Massachusetts Governor William Weld and former Assembly Minority Leader John Faso outlined their visions for improving New York's business climate, Governor George Pataki warned the small business leaders that state legislators seem poised to enact a budget that will include ill-advised increases in spending and too little in tax cuts and critical policy reforms.

"I'm very concerned that the reforms we need “aren't going to be included in the budget, the Governor said in his luncheon address at the Empire State Plaza Convention Center. The Governor said the legislature's budget would not pass necessary reforms in the state's taxes, Medicaid, welfare and workers' compensation programs.

"It is wrong to increase spending by over $1.5 billion and not reduce personal income taxes," the Governor said. He said it was also wrong to increase spending but not eliminate the state's marriage penalty, estate tax, or alternative minimum tax on businesses.

The Governor urged the 400 people in attendance to knock on their legislators' doors and urge lawmakers to pass reforms necessary to improve the state's business climate.

Weld and Faso both outlined reforms they said were necessary to keep taxes and spending down.

Faso outlined a detailed plan for alleviating the state's "self-inflicted" economic distress.

"Number one: Put the state on a spending diet," Faso said. He said the state's spending should be restricted to the rate of inflation and personal income growth.

Weld said he favored the idea of exempting the first $75,000 of income from New York state personal income tax as a way of keeping jobs and businesses in the state and attracting new ones. He noted that he first saw the idea advanced earlier this month in an editorial in the Binghamton Press & Sun-Bulletin. Weld cited a recent Business Council survey of employers which found that New York businesses fear taxes and other costs will continue to drive jobs away.

"The best social program is a good job," Weld said.

Faso predicted this year's budget would increase spending by 11 percent. "It's like Albany has designed a car with an accelerator and no brakes," Faso said. "Sooner or later, you're going to crash."

Faso also said he advocated elimination of the estate tax, a reduction of corporate franchise tax for manufacturers, and elimination of the ton-mileage tax on the trucking industry.

It is also important to "eliminate the hidden taxes New York places on health insurance," Faso said. The cost of health insurance is high enough without the government adding on fees and taxes, he added.

Both candidates agreed that property taxes had to be addressed at local and state levels.

"In education, not everything that works costs money, and not everything that costs money works," Weld said. The former governor said New York should adopt a measure similar to one adopted in Massachusetts in the 1980s called Proposition 2 ½. The measure makes sure the property tax levy in a community doesn't exceed 2 ½ percent of all taxable property.

"It's succeeded in avoiding spikes in property taxes," Weld said.

Faso pointed to the Triborough Amendment to the state's Taylor Law as a leading cause of school spending increases. The Triborough Amendment mandates that provisions of expired union contracts are binding until a new contract is ratified. Faso said he would work to change the way public employee contracts are negotiated as a way of limiting school spending.

In addition, Faso said each county in the state doesn't need multiple school districts with overlapping functions. There is "no reason why all those administrative functions can't be consolidated," he said.

Both candidates criticized leading Democratic candidate Eliot Spitzer.

Weld said Spitzer has suggested substituting the state's personal income tax for the school property tax. That's a move that could mean a 30 to 50 percent increase in the personal income tax, Weld said.

"My prediction is that Eliot Spitzer, if elected, would raise taxes and them raise them again," Faso said. He criticized Spitzer for talking about additional state spending without outlining a plan for tax relief.

The candidates were followed by a forum on small business matters, moderated by Mark Alesse, state director of National Federation of Independent Business.

Panelists included Mark Barstow, vice president of operations of Oak Tree Homes; Jeff Bray, president of the Fulton County Economic Development Corporation; Assemblyman Joseph Morelle (D-Rochester); Senator Ray Meier (R-Utica); and Tom Ulbrich, president of Ulbrich’s Garden Center in Erie County.

The panel discussion focused on economic differences between Upstate and Downstate. Senator Meier said that the Downstate political culture had given rise to special interests that had state-wide reach.

After Pataki’s keynote address at the conference’s luncheon, Assemblyman Mark Weprin (D-Queens) and Assemblyman Robin Schimminger both commented on the need to recognize the importance of small business to New York and make the state’s business climate more friendly to small businesses by reining in taxes and reforming workers’ compensation.