The Home Secretary says council staff should not use undercover techniques for minor offences such as cracking down on dogs fouling pavements.
Regulation of Investigatory Powers Act (Ripa) was introduced in 2000 to allow police and security services to fight crime and terrorism.
Local authorities in England and Wales were permitted to use some covert techniques to tackle crime such as benefit fraud.
But councils have been accused of targeting minor offences and opposition parties say Ripa is a 'snoopers' charter' which needs reform.
One improper use cited by the Home Office was an investigation into parents using a false address to get their child into a preferred school.
Ministers said that an official should have simply knocked on the door of the home in question.
Home Secretary Jacqui Smith said: "I don't want to see these powers being used to target people for putting their bins out on the wrong day or for dog fouling offences.
"I also want to make sure that there is proper oversight of the use of these powers which is why I am considering creating a role for elected councillors in overseeing the way in which local authorities use Ripa techniques."