States could be forced to hit households and businesses with new charges to pay for local rail and road projects, under a dramatic "reshaping" of infrastructure funding flagged by the Turnbull government.

In a new hardline approach to "value capture" - where those who benefit from big projects are targeted to help cover the cost - the Federal government has signalled it wants the states to rake back project costs as a condition of federal funding.

Credit:Craig Abraham

The Turnbull government has already ruled that recovering funding from the beneficiaries of large projects through "targeted contributions" should be a consideration when making decision about which projects to fund.

But a discussion paper to be released on Wednesday by Urban Infrastructure Minister Paul Fletcher suggests the controversial approach could be mandatory for federal cash.