An inquiry into the future of local government by the former chief executive of Birmingham City Council proposes smaller council tax bills for the least well off and additional rates for the business community.

Sir Michael Lyons, in a report for HM Treasury, said people in homes worth more than #2.5 million should pay more council tax. He also proposed reforming the benefits system to make sure that pensioners and low-income householders claim almost #2 billion in council tax rebate that they are entitled to.

Local authorities should be given more flexibility by central Government about how they spend their budgets and should also be allowed to impose additional charges for collecting and disposing of waste, Sir Michael recommended.

And he recommended the Government should consider permitting councils to levy an accommodation tax on tourists. Sir Michael's proposals for a supplementary business rate, which could be levied by local authorities after extensive consultation with local firms and companies, received a lukewarm reception from the Birmingham Chamber of Commerce and Industry.

Chamber chief executive Jerry Blackett said businesses would be concerned about the impact a supplementary rate would have on profits.

He called for "full and frank" consultation over Sir Michael's suggestion.

Mr Blackett said he was worried that businesses would end up being taxed too heavily and would have little control over the way a supplementary business rate was raised and spent.

However, Sir Michael said a 4p in the pound supplementary rate would raise enough cash to fund a 10-year loan worth about #3.4 billion. The money could be used to pay for economic development, which in turn would benefit the business community.

Sir Michael Lyons raises the prospect of a new golden age for local government in his long-awaited report, argues Public Affairs Editor Paul Dale:

The Lyons Report, which took its author two-and-a-half years to complete, has inevitably been presented over many months as essentially an inquiry into the future funding of local government.

Speculation about what the final document might or might not say centred on the future of council tax, the possibility of property revaluation and, at the more extreme end of commentary, the spectre of faceless bureaucrats hiring helicopters to spot patio and conservatory extensions in order to extract more money from well-off householders.

Sir Michael Lyons' report is actually only partly about finance. It is not surprising that he recommends sticking with a slightly reformed council tax, since most alternative methods of raising money have their own flaws and have in any case been rejected in the past by both Labour and Conservative governments.

The real meat of the report is the message it sends out about the need for radical reform of the relationship between central and local government. This is the devolution agenda, or as Sir Michael puts it, the opportunity to empower communities if local authorities can show themselves to be champions of value for money.

Sir Michael, who as a former chief executive of Birmingham City Council has vast experience at the sharp end of service delivery, calls on the Government to allow local authorities more local flexibility and choice.

He demands a "real shift" in the balance of influence between central and local government, although he concedes that this will not be easy to achieve.

"The history of the past 30 years is marked by a series of well-intentioned devolution initiatives, which have often evolved into subtle instruments of control. But it is an effort worth making," he comments.

Sir Michael stresses the importance of changing behaviour in all tiers of government and of the "pressing need to inspire a sense of powerfulness in local government". He demands improvement of all government, through "clarity of responsibility, alignment of purpose, and lean and efficient working practices".

He puts it in the following terms: "We now have a real opportunity – with clear evidence of improvement in local authorities across the country, resurgent and self-assured cities, and an acceptance across the political spectrum of the need once again to empower our communities – to foster a new public confidence in local government, and perhaps in representative government at all levels.

"To meet this opportunity, central government needs to provide the space, the framework and the incentives that will release the energies of local councils – but they must in turn embrace the wider place-shaping role, further strengthen their engagement with those they serve, and establish themselves as unequivocal champions of value for money."

The sting in the Lyons tail is in his analysis of public opinion, where he draws a distinction between what people want and what they are prepared to pay in the form of taxes.

He says: "I have become increasingly concerned that our expectations of what government can do for us grow faster than our willingness to meet the costs of those expectations through taxation, and possibly even beyond what can be delivered.

"Helping citizens to engage in honest debate about our choices, both as a nation and as individual communities, is the big challenge for this and for future governments."

Sir Michael wants local government to have the space and the willingness to work with residents to establish clear priorities for the future shape of public services and to "strike the right balance between what is done for us and what we do for ourselves".

It is, he reasons, sometimes good to be different.

And in an obvious tilt at the Government's insistence on common inspection regimes and consistent standards, he has this to say: "I, for one, would hope to see debate about postcode lotteries being replaced, over time, by discussion of managed difference – recognising the right and the ability of local communities to make their own choices, confident in their own competence, and in the knowledge of their own preferences."

It is a brave and far-sighted report, but will it ever ever really form the basis for radical reform?

Or, like so many other scholarly contributions since the Layfield Inquiry of 1976, will Sir Michael's efforts be consigned to a very large pending file at HM Treasury?