ALBANY -- Gov. David Paterson indicated Thursday he wants state lawmakers to pass legislation that would link property taxes to household incomes as a way to lower New Yorkers' bills.

There's just one problem: The state doesn't have the money to pay for it.

Paterson said Thursday during a meeting of legislative leaders in Manhattan that the state's two-year budget gap has increased to $10 billion, compared to about $6.7 billion in July.

Paterson wants lawmakers back at the Capitol on Nov. 10 to close the current $3.2 billion mid-year budget deficit. He proposed cuts in health care, education and increases in revenues. He expects to release his mid-year fiscal update Friday.

But while Paterson was warning of the fiscal crisis, he earlier in the day asked lawmakers to consider putting in place a so-called circuit-breaker program, which would limit a homeowner's property taxes to a percentage of their income.

He said the measure should be approved along with his call for a cap on state government spending; he also still supports a cap on school spending, aides said.

Depending on future state surpluses, the measure could save homeowners between $500 and $1,500 a year in property taxes, Paterson estimated. People with household incomes up to $200,000 upstate and $300,000 downstate would be eligible.

His aides said he wants the measure on the books so the program could be implemented when the state's fiscal condition improves. But that is expected to be years away: The state faces about a $40 billion deficit over the next three years.

"Albany is notorious for two things: overspending and overtaxing. My legislation solves both," Paterson said in a statement.

Assemblywoman Sandra Galef, D-Ossining, Westchester County, said Paterson has the right intentions, but it would cost about $1 billion just to get the program up and running.

"We just don't have resources to do the circuit-breaker at this moment," said Galef, who supports the measure and heads the Assembly Real Property Tax Committee.

Legislative leaders said they will work with the Democratic governor to close the budget gap. But Senate Democratic Leader John Sampson, D-Brooklyn, reiterated his conference's ongoing concern about cutting state programs.

"These are things that will have a serious impact on our constituents in the state of New York," he said.

Paterson said no one is happy with having to cut services, but warned the state's fiscal condition continues to suffer. He said the state faces running out of money to pay bills in December.

"This is going to be a painful budget process," he said. "Nobody wants to do any of the things that we're doing."