In his first address to the General Assembly as Maryland's chief executive, Acting Gov. Blair Lee III today asked for an overhaul of the state's ethics laws to help erase the "absolutely intolerable" image left by years of scandal.

Some of the so far unspecified proposals may seem harsh. Lee said, "But, my friends, they are the price we must pay to regain the full confidence of our own people and the full respect of our neighbors."

Lee also submitted a $4.4 billion budget - 11 per cent more than last year's state budget - with a packag of property and income tax revisions designed to save taxpayers $73 million next year.

Lee delivered his first state-of-the-state speech to the legislators in place of Marvin Mandel, who was suspended from office after being sentenced to four years in prison following his conviction on corruption charges in August. Mandel's friend, ally and lieutenant governor throughout the nine years of the Mandel administration, Lee has also set out this year to win election as governor on his own.

The 61-year-old Montgomery County native told the General Assembly that he is indeed an "acting" governor but one "who intends to act. The last thing that Maryland needs right now is an executive caretaker who will fill out the unexpired term, handle the routine chores and let the big problems slide," Lee said.

He promised to submit his ethics package in the near future. Among other things, he said he will propose the closing of loopholes in current ethics laws, and extend those laws to all public officials in the state. Enforcement power - now scattered throughout the apparatus of government - would be centralized in one strong agency, he said.

Most of the major corruption cases have been handled by U.S. prosecutors in Maryland. One reason, critics have said, is that Maryland law has given politicians all sorts of escape hatches and that local authorities for the most part, have been left powerless to pursue political corruption.

Although Maryland has laws addressing conflict of interest, campaign financing, financial disclosures and ethical conduct, according to Lee, the statutes "are full of loopholes, they don't apply to all officials, they stop short of being really convincing and the enforcement agencies are weak and scattered."

While concentrating his remarks on the legislative and spending programs spelled out in his voluminous written budget message, Lee devoted the beginning and end of his speech to issues o fmorality, or Maryland's spirit.

Conventional wisdom, he said, would "remind us with a malevolent sneer" of certain developments in the state's recent political history - Mandel's conviction on political corruption charges and his suspension from office Oct. 7; Lee's untimely emergence as the state's chief executive, and the arrival of an election year "when executive clout is at ebb tide."

"So conventional wisdom," he said, "would puff itself up and proclaim that, by all the rules of political orthodoxy, Maryland must be in dire straits - beaten down by its misfortunes, confused by unfamiliar conditions, uncertain as to its direction, and on the whole a poor credit risk for anybody."

He then rejected that strain of conventional wisdom as "totally wrong," giving as his reasons the "inner strength" of Marylanders, the "durability and adaptive resilience of our executive institutions" and the good sense of legislators "who know that they must govern in a time for governing and politic in the time for politicking."

Returning to a similar theme at the end of his message, Lee noted that while attending last week's inauguration of Virginia Gov. John N. Dalton in Richmond, three Virginia officials said "it certainly is too bad about all the trouble you've been having in Maryland."

"Yes, it is too bad," Lee declared. It's more than too bad. It's absolutely intolerable. Let's start right now and get ourselves out of this morass."

The ethics proposals and the tax measures will be considered by a relatively unpredictable General Assembly, prodded by an administration which has lost many of its most effective lobbyists.

The acting governor's package was described by a Republican member of the House of Delegates as "a veritable grab bag of goodies."

Lee is able to simultaneously recommend an increase in state spending and a cut in state taxes because of a forecasted $128 million budgetary surplus. The onetime only windfall resulted from the unexpected upturn in the state's economy, and the success of the Maryland daily lottery game, whose profits go to the state, and last year's increase in the state sales tax rate.

Among his proposals, Lee called for liberalizing the standard deduction on state income taxes, lowering the state property tax rate, allowing working parents to deduct certain child care expenses and immediately cutting local property tax assessments 10 per cent.

The budget also seeks an increase in state employee wages and fringe benefits by 5 per cent, as expansion of the Medicaid program by liberalizing eligibility standards, improvement in the quality of prison facilities and an increase in the state's elementary and secondary aid to education by $66 per pupil.

Among large capital programs, Lee proposed spending $60 million for the construction of elementary and secondary schools and $29 million to cover Montgomery and Prince George's counties' participation in the costs of Washington's Metro rapid transit system.

The largest portion of the surplus, under the Lee proposal, would be used to extend tax relief to Marylanders. If all of the property and income tax reforms were approved by the assembly, they would account for $73 million in tax savings next year.

Among income tax reforms, Lee has asked the legislature to raise the maximum standard deduction on state income taxes from the current level of $500 to $1,500 for individuals and $3,000 for a married couple. If approved, the proposal would save $75 for the single taxpayer and as much as $187.50 for married couples.

Since the proposal would severely deplete local revenues derived from state income taxes - (tax bills in most jurisdictions include an extra 50 cent levy for local governments for every $1 paid in state taxes) - Lee has recommended giving local subdivisions $15 million the first year and $10 million for each year thereafter to make up for the deficiency.

Another income tax measure proposed by Lee would raise the maximum exemption from $3,200 to $5,300 on income earned from pensions of persons 65 years old or older. That proposal would allow the elderly to avoid paying taxes if they received less that $5,300 a year in pension income.

Working parents would be allowed to deduct from their taxable income certain costs of caring for their children during working hours and dependent students would be granted the same tax exempt status as other taxpayers (no taxes on less than $2,950 a year in income), under the Lee recommendation.

In the area of property tax reform, Lee is seeking to immediately slash assessments by 10 per cent. He also wants to place a constitutional amendement on the ballot in next November's election authorizing the legislature to change the frequency of property tax assessments.

A separate Lee proposal would restore the old method of reassessing residential properties once every three years instead of annually and limit increases in assessments of 18 per cent within the three year assessment cycle. Another recommendation would grant home owners an exemption for the first $5,000 of the assessment on their property.

The property tax paid by home owners varies from political subdivision to subdivision. It is calculated by multiplying the tax rate (set by each subdivision's governing body) and the assessed value. In Prince Georges County, the tax rate is $3.41 per $100 of assessed value. In Montgomery County, the average rate is $3.70 per $100 of assessed value.

If the Lee property tax package was enacted, a home owner who received a notice last fall that his assessment is $10,000 would be paying taxes this year on a $9,000 assessment (a 10 per cent decrease). Next year, if the constitutional amendment was ratified by voters, he would pay taxes on $4,000 of that assessment (after deducting $5,000). The $9,000 could not be increased more than 18 per cent every three years.

A wealthier home owner whose assessment notice showed $30,000 in assessed value for his home would deduct $3,000 from his tax liability this year (leaving him with $27,000) and pay taxes on $22,000 the next year.

A measure with smaller savings potential for Maryland taxpayers would shave 3 cents off the state's property tax rate of 23 cents per $100 of assessed value. For owners of a $20,000 home, the 3 cent reduction would save $6 a year.

Lee's property tax proposals have inspired controversy among local governing bodies, which view the measures as an erosion of local revenues, and business interests, which fear local subdivisions will boost their tax rates to compenstate for the loss of home owner taxes.

The largest slice of the state budget is carmarked for public education - 1.3 billion, or 30.5 per cent of total state spending. Of that amount, Lee has proposed spending an extra $26.7 million in state aid to education by raising the state's contribution from $624 to $690 per pupil. CAPTION: Picture, Gov. Blair Lee's $4.4 billion budget broken down and su perimposed against a background of state of Maryland. By Milton Clipper - The Washington Post