People are "pretty much at the limit" of what they are prepared to pay in Council Tax, Welsh Secretary Peter Hain said today.
Councils across Wales face the threat of being capped by the Assembly this year if they increase their budget by more than 5%.
Mr Hain told an audience of council leaders in Swansea that local authorities should only put forward moderate spending increases over the next few years.
He said: "I believe it was essential for authorities to exercise moderation in their budget increases this year, so as to minimise the impact on council tax payers, and it will be necessary to do this for some years to come.
"I think we are pretty much at the limit in terms of what people are prepared to pay in council tax and council tax rises. We need to work together to address this issue."
He also attacked Liberal Democrat and Plaid Cymru plans to scrap council tax and replace it with a local income tax, saying this would lead to a cut in services.
Rodney Berman, Liberal Democrat leader of Cardiff council, said local democracy was being undermined by threats of capping.
Plaid Cymru local government spokesman Dai Lloyd said: "Replacing council tax will not mean a cut in services. Our policy would ensure a fair system of taxation based on the ability to pay. Does the Secretary of State not believe in the principles of fairness and justice?
"Local government remains underfunded while New Labour continues to fund Wales with the discredited Barnett Formula. We need a fair funding formula for all.
"If there is pressure from the Labour Assembly Government on councils not to raise taxes in the lead-up to the Westminster election, it will mean cuts in public services."