A new bin tax for removing household waste could be on the way after it was recommended in a review of local council funding for Gordon Brown, the Chancellor.

A report by Sir Michael Lyons said councils could be given a power to impose a charge for waste collection - possibly raised according to the amount of rubbish left by each house - on top of the council tax for the first time to encourage more composting and pay for recycling.

The threat of a "rubbish tax" caused outrage last night. But Mr Brown ditched more controversial proposals in the Lyons report including: the revaluation of homes which has raised fears of huge hikes in council tax; a new top band for council tax for houses worth more than £1m, the removal of spending caps on councils, and a French-style bed tax on British hotels.

The waste tax was lambasted last night by the shadow Local Government Secretary, Caroline Spelman, who described the Lyons report as a "tax bombshell" for working families and pensioners before the Government made it clear that many recommendations were being rejected. She warned that the prospect of new "rubbish taxes" combined with fortnightly dustbin collections could have damaging consequences for public health and the environment.

"If you don't pay, your bins just won't be collected. These taxes will lead to a surge in fly-tipping and dangerous backyard burning," she said.

"It will have devastating consequences for the local environment and public health. This isn't a green tax - it's an excuse to tax more by stealth."

She also raised fears that the report's proposals for a new upper rate of council tax to take account of soaring house values would give the "green light to intrusive and expensive inspections of family homes." Ms Spelman claimed: "Nice neighbourhoods and the rising value of homes will all mean higher council tax bills. Regular revaluations will turn council tax into a home improvement tax - taxing your patio, your conservatory and garden."

Sir Michael said those using bigger bins could be given bigger tax bills. Many people thought "introducing a charging regime would act as a powerful incentive on householders to reduce the amount of waste they produce and encourage them to recycle and compost more of that waste."