New Labour zealot Stephen Byers is drawing up plans to force councils to hold a referendum if they wish to impose large council tax rises.
The MP and former local government secretary is working on the idea for possible inclusion in the Labour Party manifesto.
Mr Byers opposes capping and sees referendums as a way of forcing the public to choose between higher taxes and service cuts.
Under the plan, councils raising taxes by more than twice the rate of inflation would have to put the increase before ratepayers.
A spokesman for Mr Byers said he had not been approached by ministers but had 'tasked himself' with devising solutions to a number of public policy problems, including local taxation.
According to Mr Raynsford, the government has no specific plan to introduce referendums, but they could be considered by the balance of funding review.
There was a mixed reaction from councils. Sir Sandy Bruce-Lockhart (Con), vice chairman of the Local Government Association, described the plan as 'nonsensical'.
The Treasury anticipates money raised by council tax next year will increase by three times the rate of inflation, so the government must recognise most councils would have to hold referendums, he said.
Steve Freer, chief executive of CIPFA, warned the proposal could lead to a 'postcode lottery'.
'Annual referendums would provide local people with an interesting choice,' he says. 'But I have a feeling some areas would persistently vote for better services and others for lower taxes. Three or four years down the line that could raise significant questions about the disparity in standards.'
John Foster, chief executive of Wakefield MBC, said referendums were 'unrealistic' in the existing media climate.
'It's not easy for councils to make their case when local government finance is such a hugely complex thing,' he added.
Referendums seen as the easy option
Daphne Bagshawe (Con), deputy leader of East Sussex CC - which had the highest tax increase this year at 19.6% - said only councillors could weigh up the pressures within local budgets.
Senior local government sources say Mr Byers is still influential, and the government could see referendums as a politically acceptable alternative to capping.
However, one source added: 'It doesn't sound well-thought out, and getting it through Parliament could be messy. They will see referendums as an easy option, but they know no council will want one.'
HOW WOULD THE PUBLIC VOTE ON COUNCIL TAX RISES?
Previous referendums on proposed council tax rises suggest voters will tend to choose the lowest option - but not always
Referendum held in Feb 2002
Bristol City Council
Referendum held in Feb 2001
Milton Keynes Council
Referendum held in Feb 1999
SPOT THE DIFFERENCE
Inflation Headline inflation figures are measured by the retail prices index, defined as an average measure of change in the prices of goods and services bought for consumption by the majority of households in the UK.
Council budgets On top of inflation, councils must factor in many additional pressures. These include the passporting of additional funding for schools, teachers' pay and pensions, increased national insurance contributions, increased demand for special educational needs spending, funding to tackle bed blocking and spending on meeting European regulations on waste disposal.