And the government is also copping criticism from the private sector about separate plans for a new tax.

City of Greater Bendigo chief executive Craig Niemann has criticised the government's new plan to stop paying rates on $54 million worth of property across major regional and metropolitan council areas.

"I think they just see us as a fairly soft target, to tell you the truth," Mr Niemann said.

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"They make the acts of parliament [which] apply to local government. Whether they consult or not, or whether they really research the impact it's going to have - that doesn't always happen to the extent that it should."

Under the plan, the government would directly invest all money it saved back into social housing.

Social housing agencies would also be exempt from paying $11 million in rates, which would also be reinvested in upgrades.

Bendigo's council fully agrees something must be done to bring the state's housing up to contemporary standards.

"But yeah, it's a bit of a blow," Mr Neiman said of the decision to use council funds.

It was not responsible for decades of governments' decisions to underfund social housing.

Bendigo councillors will now have to work out whether they will need to raise residents' rates to cover a loss of what the government says will be a $1.3 million loss, but which could be up to $2.3 million under one initial council estimate.

They could avoid raising residents' rates by cutting services or scouring its budgets for efficiencies, like it has been doing since the government decided to peg rate rises to inflation in 2016.

Last week, the Australian Services Union released research suggesting Bendigo has missed out on 133 public and private jobs in the belt tightening that had followed rate capping's introduction.

The council usually raises about $100 million a year from Greater Bendigo ratepayers, or about 60 per cent of its total revenue.

There are about 2540 properties around Greater Bendigo that could potentially be included in the reforms.

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The rates exemption is not the only controversial position the government has taken in its search for public housing money.

It is also planning to phase in a new tax on builds and subdivisions of three or more, which would net it $800 million a year.

The Urban Development Institute of Australia condemned the government's idea as "yet another tax" that would add tens of thousands of dollars to the cost of a new home.

"Victorian homebuyers already pay up to 42 per cent of the cost of a new home on taxes, fees and charges, meaning $420,000 on an average $1 million home," the group's president Tom Travaskis said.

"The Government needs to realise it can't tax its way to housing affordability."

The reforms are yet to go to parliament.

A government spokesperson defended the ideas, arguing they would set up a sustainable supply of low cost housing for generations to come.

"The changes to exempt social housing from paying council rates - which bring it in line with local government rates exemptions for other essential public services like schools and hospitals - recognise the vital need to provide a roof over the head of those who need it most in our community," they said.

"Every dollar from this rates exemption measure will be invested back into social housing maintenance and upgrades across the state, as well as improving local amenity, safety, and security.

"Community housing providers will also reinvest their savings back into social housing."

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