The rate peg limit, set by the Independent Pricing and Regulatory Tribunal, determines the maximum amount rates can be increased each year.

If councils want to increases the charges higher than the limit, a formal request has to be made to IPART.

But following a report from the NSW Productivity Commission that stated the rate pegging limit hindered growth within the community, Local Government NSW has renewed calls for it to be abolished.

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The Productivity Commission says the local government rate pegging limit "creates a financial disincentive for councils to accept growth" and "increases their dependence on other revenue sources".

For the 2020/21 financial year, the rate pegging limit was set at a 2.6 per cent increase, which was adopted by Dubbo Regional Council.

The year before it was 2.7 per cent and in 2018/19 it was 2.3 per cent.

The rate peg is mostly based on the Local Government Cost Index, which measures the costs for goods and labour that an average council will use.

LGNSW president Linda Scott said the rate peg meant councils didn't have the flexibility they needed to fund the infrastructure and services they were expected to provide.

"The NSW government's long-standing policy of rate pegging has resulted in a shortage of parks and green spaces, footpaths, sporting centres, roads, cycle paths, bridges, drainage and a range of other vital community assets and undermined the financial sustainability of councils," she said.

Cr Scott said the issues paper identified LGNSW's long term push that the "antiquated rate pegging system, birthed out of the economic upheaval of the 1970s oil crisis" needed greater flexibility.

She said removing the rate pegging and creating a better system for developer contributions - also raised in the paper - would lead to the strongest possible locally-led recovery for NSW.