COUNCIL tax bills could fall by as much as half under proposals to compensate communities that pay the highest tolls for driving on congested roads.

The Government believes that reductions in council tax may be a better way of offsetting the extra income from tolls than cutting fuel duty or road tax. Ministers have promised that the introduction of national road user charging, under which motorists will be tracked by satellite and pay up to £1.34 a mile on the busiest roads, will be revenue neutral.

Tolls would raise up to £10 billion a year, most of which would be paid by drivers in cities. Most roads would be charged at only 2p a mile, meaning that the average driver would pay only £4 a week. But a study last week found that drivers in Greater London, where 40 per cent of Britain’s congestion is concentrated, would pay an average of £20 a week.

The Department for Transport had been considering reducing fuel duty by an amount equal to the sum raised in tolls. But it is seeking a new approach after research from Imperial College found that cutting fuel duty would encourage much greater use of cars in rural areas, where tolls would be lowest. Stephen Glaister, Professor of Transport at Imperial College, forecast that traffic would rise in rural areas by as much as 26 per cent.

Under the plan being considered jointly by the DfT and the Treasury, local authorities would control the profit from tolls and divide it between investment in public transport and reductions in council tax.

The Government’s Commission for Integrated Transport has calculated that a charging system applied to all roads in London would raise £3 billion a year. About a third of this would be spent on operating the system and another third on providing better bus and rail services. That would leave £1 billion a year to be used to reduce council tax.

David Begg, the former chairman of the commission, said that cutting council tax would be fairer because people who rarely used cars and contributed the least to congestion and pollution would be the greatest beneficiaries. “It is far better to tax activities you want to discourage, such as driving in towns, than tax people for owning property,” he said.

However, those who depended on their cars would face much higher motoring costs, with the increase outweighing any gain from reduced council tax. Professor Begg said that council tax could be lowered in advance of introducing road tolls to win public support for the system. “The biggest obstacle to road charging is public opinion and people are far more likely to accept it if they see the benefit beforehand in lower council tax bills. Councils are also more likely to co-operate because councillors know halving council tax will play well with the electorate.”

The idea of offsetting toll revenue against council tax is supported in a study published today by the Chartered Institute of Logistics and Transport. It says that the alternative, of making petrol and diesel cheaper, would “have adverse environmental and social impacts on the countryside and smaller towns and villages, and weaken the economy of cities”.

The institute welcomed the Government’s commitment to hold a significant trial of road charging. But it voiced concern over the “frustratingly slow” progress: the trial is unlikely to start before 2010.