Councils in England have been left in an "impossible position" by ministers' decision to scrap the national council tax benefit system, which has saved central government £414 million but left many town halls unable to protect those least able to pay, the Local Government Association said.
The warning came as spending watchdog the National Audit Office (NAO) found that the change effectively cut central government funding for council tax support by 10%, and most councils have responded by passing on at least some of that cut to low-income households which previously received help with bills.
Since they became responsible in April for designing their own local support schemes, 71% of councils have introduced a requirement for all working-age claimants to pay at least some council tax, regardless of income, the NAO found. A nd 41% have introduced minimum payments for all households, with exemptions only for pensioners and war pensioners.
The new arrangements, which mean many low-income households are having to pay the tax for the first time, have reduced incent ives to work for some council taxpayers, the NAO found. It said the Department for Communities and Local Government (DCLG) needs to "do more" to understand the financial impact which the change has imposed on local authorities.
The chairwoman of the Local Government Association's finance panel, Sharon Taylor, said: "As this report recognises, councils have been pushed into an impossible position by the Government's 10% cut in funding for council tax support.
"This comes on top of the 43% cut to local government funding and as a result many local authorities have been left unable to protect those who can least afford to pay.
"Because of Government's stipulation that pensioners have their council tax benefit protected, councils have been forced to choose between asking working-aged claimants to pay more tax or taking much-needed money away from other services.
"Protecting the most vulnerable and needy members of society is a priority for councils but - as we warned when this cut was first proposed - we cannot protect those on the lowest incomes when some of the decisions about who receives this benefit have been taken out of our hands."
Ms Taylor called for councils to be given the power to reduce discounts on the bills of those who live alone, in order to be able to target help at those who need it most.
The NAO report found that the DCLG worked "effectively" with local authorities to ensure the new system was introduced on schedule, but noted that not all councils will achieve the objectives outlined by the department to improve incentives to work and protect vulnerable people.
With local authorities given freedom to design their own schemes, most have cut support for claimants and used new powers to charge more council tax on second homes and temporarily empty properties in order to absorb some of the impact of the reduced funding.
Ms Hodge said: "Local authorities deserve recognition for implementing council tax support on schedule in what is an extremely difficult environment for local government. They had just nine months to do so because it took the department 19 months from announcing the policy to issuing councils with guidance on designing local schemes.
"The department expects to save £414 million by localising council tax support in order to assist the objective of deficit reduction, yet in doing so it simply transfers costs from central to local government, at a time when councils are already facing significant budget cuts.
"I have real concerns about the financial impact this will have both on local authorities and on claimants.
"The Government has cut funding for council tax support by 10% and more than 70% of local authorities have passed some of that cut on to claimants. A large number of people on low incomes will have to pay council tax for the first time. While pensioners are protected under the new arrangements, many local authorities have not been able to protect other vulnerable groups such as lone parents or people with a disability.
"There is a danger that local authorities will find it increasingly difficult to collect the council tax owed if those on the lowest incomes struggle to pay. I am concerned that councils in the most deprived areas may particularly struggle."
Local Government Minister Brandon Lewis said: "Spending on council tax benefit doubled under the last government, costing taxpayers £4 billion a year - equivalent to almost £180 a year per household. Welfare reform was vital to tackle the budget deficit we inherited.
"Our council tax policies are working. Localised council tax support has also given councils stronger incentives to support local firms, cut fraud, promote local enterprise, get people into work and end the 'something for nothing' culture.
"This Government is funding a five-year council tax freeze that has already delivered a 10% real-terms reduction in bills for hard-working families. This is in stark contrast to the last administration when council tax bills doubled."