Mr Raynsford said the government was preparing to ease the burden on council taxpayers by allowing councils to raise an extra £1bn from businesses. Other sources of revenue may also be sought.
Ministers are alarmed at the rise in bills, which has resulted in charges of £1,102 for an average Band D home in England, an increase of 60% since Labour came to power. Bills in some areas have risen by 40% in the past two years.
The increases have led to threats of civil disobedience by pensioners in Devon who say they cannot afford the increases on their fixed incomes and are refusing to pay.
In July, chancellor Gordon Brown estimated that an extra £1bn could be raised in the first three years from the scheme to allow councils to retain some of their uniform business rate. It was presented as part of a drive to encourage new business start-ups. However, Mr Raynsford made it clear he wants the money to curb council tax rises.
Ruth Lea, head of policy at the Institute of Directors, said: 'Business will be very concerned at any attempt to raise more taxes and use UBR as the milch cow for local authorities'.
Mr Raynsford also made clear that the government could not avoid the revaluation of properties in 2007 - after the general election - which could lead to another hike in council tax to match rising property values.
COUNCIL TAX RISES HURTING US, PRESCOTT TOLD
Ministerial fears that big ri ses in council tax are harming the government have been aired in a leaked letter to deputy prime minister John Prescott, reported The Sunday Times (p2).
It demonstrates that ministers accept they have presided over 'record rises' in the tax, which is a frequent refrain of critics. The disclosure comes after ministers announced last week they are considering a U-turn on local government spending. They had promised councils more freedom to spend as they saw fit but now start to impose caps on some councils - (even those rated as excellent).
Ministers fear they will face a backlash from voters at the next general election if council tax continues to rise. It has climbed 70% since Labour came to power in 1997.
Police authorities in Norfolk and Devon and Cornwall, whose councils have seen large rises, have warned the deputy prime minister and Home Office that feelings are so high they fear civil unrest could erupt if people take to the streets to protest. In Brent East, north west London, where Labour went down to a shock defeat in last week's parliamentary by-election, council tax has risen by 22.5% this year.
The admission over the effect of council tax increases is made in a letter to Mr Prescott by his deputy, local government and regions minister Nick Raynsford. It is dated 11 September. After outlining he was prompted by the fact that council tax across England and Wales rose an average 12.9%, he wrote: 'Although I am very reluctant to pull back one of the freedoms and flexibilities which we announced last year, I think the experience of this year...suggests we must put all authorities on warning that we are prepared to use our capping powers against them'.
FEARS OVER PENSIONER CIVIL UNREST SPREADS
Norfolk Police Authority chairman Jim Wilson has told deputy prime minister John Prescott that police are bearing the brunt of outrage over 15% council tax hikes because people believe the extra money is going to them, reported The Mail on Sunday (p11).
He said in a letter: 'High police p recepts over the past five years are leading to resentment and to potential civil unrest. In Devon and Cornwall in the past couple of weeks people have been beginning to show deep resentment'.
Home owners have set up a nationwide network of protest groups linked by the internet. Earlier this month, 1,000 pensioners lobbied parliament to protest over ministers' refusal to cap excessive rises.
One of the leaders of the protest in the south west. Michael Wade-Brown, 73, has applied his own 'cap' by paying East Devon DC the same as he paid last year, plus his pension increase.
He said: 'Initially, the council threatened me with all sorts of things. Then they said I'd be taken to court, but after that it all went quiet. There are more than 250 people doing the same thing and I think they are worried we'd clog up the system if they took us all to court'.
The retired farm manager's two-bedroom bungalow in Sidmouth is in council tax Band E, landing him with a bill for more than £1,300.
'It takes up 25% of my pension and I'm having to draw on capital to pay the bill. That's not what I saved my money for', he said.