This will probably reduce my chances of coming up with a Halfling Paladin Class Act for Dragon, but I can live with that.
When doing racial substitution levels, consider the unique characteristics of the race that make certain class abilities less useful or less suitable thematically, then consider how to replace them.
For example, a halfling paladin might be more focused on defense than a standard paladin. His aura of courage may not be as useful to other members of his race because they already gain saving throw bonuses against fear. He would want to attack from a distance rather than close up, to take advantage of his better Dexterity.
So, I would replace the standard paladin's smite evil ability. Elven paladins already get ranged smite, so how about something else instead? In keeping with the halfing's focus on defence, perhaps it would be something to hamper an evil opponent, reducing its effectiveness in combat. Perhaps a weaken evil ability - once per day, a halfling paladin may attempt to weaken evil with a melee or ranged weapon attack. If the attack hits, the opponent takes a penalty to Strength equal to the halfling paladin's Charisma bonus plus half his paladin level for 1 minute (Will half, DC 10 + half paladin level + Charisma modifier). This ability cannot reduce an opponent's Strength below 1. If the attack misses, or he hits a non-evil opponent, his daily use of this ability is wasted. The halfling paladin gets more uses of this ability at the same rate at which a regular paladin gets more smites.
I would also change the Aura of Courage ability. The halfling paladin should continue to be immune to fear, perhaps with a Courage ability. However, his aura should grant something else, perhaps an aura of protection that grants +1 sacred bonus to AC and saving throws against evil attacks.
Finally, since I don't expect a halfling paladin to be in melee a lot, I would change his special mount's Strength adjustment to a Dexterity adjustment.
There, halfling paladin substitution levels at 1st (weaken evil), 3rd (aura of protection) and 5th (agile mount).
EDIT: Added Will save to weaken evil ability.