Councillor Bradbery said the policy reversal - announced by Acting Premier John Barilaro and Local Government Minister Shelley Hancock on Tuesday - means council can use the funds for local projects.

The government is raising the levy to help fund better workers' compensation coverage for firefighters diagnosed with one of 12 work-related cancers.

The levy would have cost the state's 128 councils a collective $13.6 million in the 2019/20 financial year. For Wollongong City Council, the levy would have been $213,000.

Cr Bradbery said the additional cost - and the late notice given by the government to councils - was "ill conceived".

"Wollongong being a larger council would have taken it from our strategic reserves and copped it on the chin," he said.

"However for many country councils, with large areas vulnerable to bushfires, it presented a major challenge. Especially given that it was issued so late and councils had already prepared their budgets for 2019/20.

"So I'd welcome the government's decision this week, and we at least have forewarning for the 2020/21 budget.

"However it's still going to be an impost on councils, and will divert funds from local services and infrastructure."

Cr Bradbery said it was another example of "cost shifting". "There's always the pressure of things being pushed back on local government," he said.

Mr Barilaro said the government recognised the additional cost presented challenges for councils, particularly those in regional and rural areas badly affected by the drought.

"That's why the NSW Government will fund the $13.6 million levy increase this year to alleviate the immediate pressure on local councils to support firefighters who develop cancer," he said.

Ms Hancock said the government would continue to consult with councils to better manage the impact of the levy on their annual budgeting cycles.

Local Government NSW President Linda Scott said the announcement followed months of intense lobbying by the peak body.

"The government has acknowledged it's not right to dump a massive new slug onto councils without warning," she said.

"Councils already contribute 11.7 per cent of the emergency services budget in NSW, with the cost embedded in council rates and further costs recovered through insurance premiums."

Cr Scott said the peak body was not against the broader workers compensation for firefighters: "What we could not support was the fact that these massive levy increases came without consultation or warning".

She said there was now a real opportunity for both tiers of government to sit down and develop a constructive way forward that involved a "fair and realistic transition process".