The idea, which represents a significant volte-face for the chancellor, who has so far resisted the idea of incentives to promote development, is quietly being tested by the Treasury.
It is understood that officials have privately approached consultants and industry bodies - including the British Property Federation - to come up with a wish-list of ideas.
These could include abolishing VAT on conversion of properties, reducing stamp duty in poor areas or the creation of 'urban priority areas', which could receive a cocktail of tax incentives.
It is drafting the urban white paper, which is expected to be influenced by the government-sponsored urban task force report, written by a team of regeneration specialists under the guidance of Lord Rogers.
The report, published in June last year, said that urban regeneration could be stimulated through fiscal incentives to tempt property developers to build in run-down areas.
Publication of the white paper, due in the autumn, is already almost a year late. The delay is thought to have been exacerbated by wrangling between the DETR and the Treasury.
Earlier this year, the hiatus sparked an angry attack from Lord Rogers, who accused the government of dragging it heels. This concern was echoed last week at the environment select committee inquiry into the white paper.
Chaired by Labour MP Andrew Bennett, the committee report says: 'The Treasury appears to have kicked the task force report into the deep jungle.' Tom Brake, a Liberal Democrat member of the select committee, said: 'The Treasury is not doing enough to target fiscal incentives. If it is not careful, the Treasury will stifle at birth the urban renaissance. If it is unwilling to give up any ground then it will receive flack from the members of the select committee.'
The Treasury's belated interest in fiscal incetives was given a cautious welcome by DETR officials. One source said: 'I sincerely hope that the Treasury's interest isn't just one maverick official doing a bit of homework. We were concerned that without the Treasury's backing, the white paper would have been little more than a framework document.'