The employers' organisation estimates that councils could achieve efficiency savings worth some£3bn a year, 15 per cent of the council tax bill.
It said some town hall leaders were 'dragging their feet' on reforms such as making greater use of the private sector and joint local authority purchasing.
John Williams, CBI director of public services, said: 'Its regrettable that we have got to this point but ministers are right to be tough because there is significant scope for delivering better value for money.
'Council tax rises have clearly caused significant concern and now some town hall leaders are looking for increases to business rates. Frankly, that is not acceptable when there are major question marks over performance.
'Local authorities must demonstrate real value for money before looking for other sources of funding. The CBI doesn't believe in crude capping but clearly some councils have given ministers no choice.'
The CBI is holding discussions with the Local Government Association to find ways that the private sector can help improve council efficiency.
The CBI estimate of£3bn gives a conservative indication of the possible savings that might be achieved with local government reform. It has been calculated using published government data and by analysing reports on Peter Gershon's interim review of public sector efficiency, which is being prepared for the prime minister and the chancellor.