NSW council rates are the cheapest in Australia and public sentiment against rate rises is ''unrealistic'', a review into the future of local government has found.
The chairman of the review, Graham Sansom, said securing the financial future of cash-strapped councils would involve rate increases, adding the state's ratepayers had had ''a pretty good run''.
The latest report by the Independent Local Government Review panel found NSW ratepayers were charged an average $120 less each year than their interstate counterparts, or 22 per cent, in 2008-09. It equated to $850 million in foregone revenue.
Rates are applied to homes, businesses, mines and farmland.
The Independent Pricing and Regulatory Tribunal sets the allowable annual increase on rates, known as the rate peg.
Councils can apply for a further increase if they outline their special needs, such as a high growth rate or maintenance backlogs.
But the report found despite crumbling infrastructure, many NSW councils failed to seek extra increases because to do so was seen as ''politically risky'', despite rates rising in other states without a strong community backlash.
The review, part of a broader probe into strengthening local government in NSW, found that rates had risen by 4.4 per cent a year over the past decade, well below the 8 per cent average rise in other states.
NSW homeowners paid an average $812 in 2010-11, according to the Division of Local Government.
The panel's final recommendations are due mid-next year. Its report said better financial management must be at the centre of reforms, including ''a greater effort to boost own-source revenues - especially rates''.
It has indicated the rates regime could be ''streamlined'', and the application process for small rate rises made less onerous.
Professor Sansom said rate increases should go hand-in-hand with better efficiency.
''NSW local government still has some way to go before we could say that its financial management or its productivity and efficiency … are first class,'' he said.
Twenty-four NSW councils have applied for rate rises above the peg in 2013-14.
They include Coffs Harbour, which wants to extend a long-term charge on 350 businesses to fund a major overhaul of the city centre. It is also considering an extra residential rates charge the following year.
The council's director of corporate business, Craig Milburn, said business owners supported higher rates in exchange for capital works, but conceded that generally, ''putting up rates doesn't win votes''.
''The community generally continue to have high expectations of the services they want to be delivered. How well they understand the financial realities of what councils are faced with … can be debated,'' he said.
Rockdale council is seeking a rate rise 3 per cent above the peg for five years to renew its assets.
A Liberal councillor, Nicholas Mickovski, opposed the increase, and said the council should ''identify savings within the organisation''.
''Ratepayers are already paying high enough rates,'' he said.
Ku-ring-gai council has applied to extend an infrastructure levy to improve its roads.
A spokesman said residents ''understood we couldn't fund the initiatives supported by the levies through other means''.