David Cameron has missed an opportunity with his new proposals on council tax. He talks the language of localism, but is reluctant to concede its substance.

Council tax is very unpopular. According to a YouGov poll in late August for the TaxPayers’ Alliance, council tax is seen as the most unfair of all taxes, above inheritance tax. It is most unpopular among older voters, where the Tories are doing very well now. Lowering council tax also tops the list of tax-cutting priorities, mentioned by 68 per cent, with support highest among working-class voters.

So Mr Cameron has picked the right issue. In the first half of his speech yesterday to the Young Foundation, he set out some sensible principles on local democratic control and diversity, as the party is proposing for schools. “All politicians in opposition talk about giving more power to local councils but all governments seem to end up centralising power.” Quite right, but then he fell into the same trap himself.

He rejected capping of council tax increases by Whitehall as “an old-fashioned idea straight out of the bureaucratic age”. Capping would be scrapped. Instead, councils that want to introduce high council tax rises, apparently those above the inflation rate, would have to submit their plans“ to a local referendum. Councils would explain why they want to raise their taxes by so much and show what they would do if their plans were rejected. Such ballots would be sent out with annual council tax bills and if rises were rejected there would be a rebate.

Sounds very democratic? Not really. Central government, that is the Treasury, would still set the limits of what councils can raise in taxes, and therefore what they can spend. Local discretion would remain severely constrained. In practice under capping, most councils tax and spend up to the permitted limit.

Proposals for compulsory referendums on big rises have been considered and rejected before: by Michael Heseltine in 1981, against strong Tory back-bench opposition; and by the present Government in 2003.

Three big councils have tried such referendums. In Croydon, five years ago, 74 per cent opted for the lowest of the options offered, while voters in Bristol in 2001 backed a total freeze. Only in Milton Keynes in 1999 did voters back a higher option.

There is nothing wrong in such direct democracy, provided the consequences of the options are spelt out, but it would be far better if Mr Cameron had allowed councils full freedom to decide the level of taxes, rather than face a Whitehall cap.

Even better would be if councils had to raise a much higher proportion of their own funds, not just by council tax but also by other taxes if they chose. The real trouble is that people pay too little relatively in local taxes, not too much. A bigger local tax base, offset by a smaller central tax burden, is the way to sharpen local democracy.

The Tories are too scarred by the traumas of the poll tax to consider such a shift in the central-local balance, just as Gordon Brown has deferred awkward decisions on local finance until after the next general election. Mr Cameron has been timid, when he should have been much bolder.

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