Councils should have more freedom to raise their own money and decide how to spend it, says a cross-party group of MPs and peers.
The group wants town halls to decide how to spend its money
Its report says councils should be less dependent on government grants and be allowed to tap into other types of revenue - like vehicle excise duty.
The government also needs to accept that devolution means services would be different from area to area.
But it should only intervene as a "last resort", the report says.
Only about 25% of money spent by councils is raised locally through council tax and charges such as housing rents, the rest comes from government grants raised by national taxes and business rates.
The report is the result of two years' work by the Chamberlain Group - an informal grouping of peers and MPs - including former local government ministers from Labour and Conservative governments - named after the pioneering Victorian Mayor Joseph Chamberlain.
BBC correspondent John Andrew said while Labour, the Tories and the Lib Dems were all signed up to more localism, the report made clear that, as one of the most centralised states in Europe, the UK still a long way to go.
The Chamberlain Group report says fewer grants should be "ring fenced" by local government and local authorities should have "significantly more financial freedom" to make their own decisions about spending local tax revenue.
Instead they could be assigned a portion of income tax, or other types of national revenue like vehicle excise duty, it says.
And major projects could be funded by allowing councils to issue bonds - London Mayor Ken Livingstone has been allowed to issue bonds to help fund investment in the city's transport network.
The report also calls for a joint committee to report annually on how devolution is working, and for governments to consult local leaders more, when formulating national policy.
The report comes a week before the Queen's Speech and the publication of a Constitutional Reform Bill.
It has the backing of several local government think-tanks and the Local Government Association, which represents the interests of local authorities.
Former Labour local government minister Nick Raynsford said: "To counter public cynicism about political institutions and low levels of turnout in elections, we have to find new ways to engage citizens in the political process.
"More devolution of power and the active involvement of local communities in decision-making are essential if we are to rebuild confidence in our democracy locally and nationally."
Former Conservative local government minister David Curry said government closest to the people was always left out in debates about constitutional change.
He said the report "challenges both the government and opposition parties to translate their rhetoric about de-centralisation into firm measures to deliver it".