Tasmania’s local government minister says councils should give up more revenue from TasWater.

The state's 29 councils collectively own TasWater. They recently agreed to put a cap on the current rate of dividends to pour about $82 million into water and sewerage infrastructure investment.

The councils had to cut their incomes after TasWater failed to secure a previously-hinted-at $300 million contribution to its $1.8 billion upgrade plan.

Local Government Minister Peter Gutwein spoke about the funding shortfall at a recent Local Government Association of Tasmania (LGAT) conference.

“It needs to be said though that over the same period, collectively councils would still draw down about $300 million,” he said.

“You must be prepared, in my view, to do more to address this issue and I suspect that that will need to be more than just a 10-year cap on an ever-increasing income stream.”

LGAT president Doug Chipman said it was an “extraordinary decision” to cap revenue from TasWater in the first place.

“It's an indication that local government as a sector recognise the problems and wants to work towards fixing it,” he said.

“If councils forgo their dividends in terms of water and sewerage then they are going to have to look to other means to raise the necessary revenue to run their municipalities,” he said.

Mr Gutwein claimed TasWater’s strong balance sheet means it could borrow more than it had planned.

TasWater rejected that claim when it was raised last year, saying Mr Gutwein was “ill-advised”.