The government is studying a plan that would allow local councils to reduce council taxes by funding them from income generated by satellite-tracked road tolls.

As much as £10 billion a year could be raised under the proposed national road-charging scheme, with most roads collecting 2p a mile. Higher rates of up to £1.34 a mile will be charged on congested routes and in cities.

It was expected that drivers would be ‘compensated’ with lower fuel duty but research from Imperial College has suggested that cutting fuel duty could actually increase car use, especially on low-charge rural roads. Instead, the government is reported to be looking at ways to use part of the revenue to cut council tax charges.

People living near motorways or in cities might get the biggest share and could have their rates cut by up to 50%.

The actual way the money would be spent will be under local authority control however, and it is expected they would divide it between investment in public transport and reductions in council tax.

Councils will get about a third of the revenue with the government spending a third on transport infrastructure improvements and a third going to run the toll collection system on a non-profit basis.

The former chairman of the Integrated Transport Commission, David Begg, commented: "It is far better to tax activities you want to discourage, such as driving in towns, than tax people for owning property," pointing out that people who contributed the least to congestion and pollution would benefit the most.

A third of the total projected revenue might be collected on London’s roads, the government’s Commission for Integrated Transport has calculated, bringing some £1 billion to London councils for redistribution. Don’t get excited just yet though, the scheme is unlikely to start before 2010, and even than only as a trial.