Mayor Bill de Blasio's administration on Wednesday will propose a 3.35% increase in New York City's water and sewer rates—the lowest such increase since fiscal 2006—but officials acknowledged the recommendation doesn't fully address what the mayor previously denounced as a "hidden tax."

In spring 2013, when Mr. de Blasio was a Democratic candidate for mayor and the city's public advocate, he criticized then-Mayor Michael Bloomberg's proposed 5.6% water-rate increase, accusing the administration of overcharging rate...