Communities Secretary Eric Pickles has vowed to introduce new laws to stop councils imposing stealth taxes on households next year.
Mr Pickles claims some local authorities in England are "cheating taxpayers" by not signing up to a council tax freeze.
He declared councils would be treating residents "with contempt" if they went ahead with tax hikes without holding a referendum.
The senior Tory told the Daily Telegraph that authorities not freezing council tax this year should "man up" and consult the public.
Ministers want council tax to be frozen for a third year and have said English councils wanting to impose rises above 2% should stage a vote.
Freezing the levy rather than raising it in line with inflation would reportedly save the average household around £72.
But fewer than a third of English councils have agreed to the freeze in April - compared to 99% in 2011 and 85% last year.
The coalition is preparing to take on local authorities by planning new laws meaning any large increase in council tax will have to be put to a referendum.
But some councils are said to have taken legal advice about how to exploit a loophole in the rules. Others are planning a 1.99% increase.
Mr Pickles said: "Those who put up their stealth tax by 1.99% in a bid to avoid our 2% referendum threshold need a reality check.
"We will take into consideration anybody cheating their taxpayers. Anybody using loopholes will lose out next year."
The Cabinet minister made clear that he had no problem with some councils putting up tax to fund local projects - as long as they sought the public's backing first.
His comments are the latest sign of a rift between central and local government over tax and spending amid anger at the scale of the coalition's cuts.