Auckland's planned regional fuel tax could be cut as the Government worries about levies pushing fuel prices up 14c a litre within three years.
But any reduction could jeopardise funding for several public transport projects, in particular the electrification of the rail network.
The Government is expected to announce changes to the regional fuel tax, with other transport and infrastructure plans, early next week.
Transport Minister Stephen Joyce told the Herald yesterday that the Government was concerned about the combined cost of the regional fuel tax and national fuel tax for drivers.
"We have been considering whether the regional fuel taxes are the right way to go," he said.
The Government was committed to the Auckland rail electrification, "but we're not convinced regional fuel tax is the best way to fund it".
"Nine and a half cents over the next two years is just too high on top of the national increases as well. We're into tighter economic times now."
Mr Joyce said the problem had to be addressed as soon as possible.
"The first increase starts in July. Do we let that happen, or do we find other means of paying?"
Auckland's regional fuel tax was to begin on July 1 at 2c a litre, and increase to 9.5c a litre by 2011.
The national fuel tax, approved last year, will increase prices by 1.5c a litre each year until 2012.
The national tax increase was set up by the Labour Government to fund public transport development.
From the 9.5c regional fuel tax, 8c was earmarked for Auckland's rail network, 1c for the Penlink project, which joins the Whangaparaoa Peninsula with State Highway 1 at Redvale, and 0.5c for Auckland ferry terminals and integrated ticketing.
Auckland Regional Council chairman Mike Lee said the council had already invited tenders for the supply of rolling rail stock.
"It's a carefully crafted model of capital expenditure. If you pull the rope from under it, the whole house of cards can come tumbling down."
Labour transport spokesman Darren Hughes said Mr Joyce's comments were cause for concern.
"There is no other way you could fund such an expensive project like the electrification of rail unless you borrowed for it, in which case the whole of the country would pay for it."
Mr Hughes said abolishing the regional fuel tax would be a disaster.
"We have gone through the delicate process of what the transport priorities are and how we are going to fund it," he asked.
"If they bail out on it, it puts rail further into jeopardy."
The Automobile Association is pleased the regional tax is being reconsidered, but is also concerned about alternative funding.