Cuts to council services are also likely after council officers admitted that "very difficult decisions" will have to be made when setting the budget next Tuesday.
The various political groups on Dumfries and Galloway Council have a deadline of tomorrow (Tuesday) to submit their final budget proposals, which will then be voted on next week.
Council leader Elaine Murray said today: "Council tax rises and savings are inevitable, however the administration's budget seeks to limit these as far as possible."
Gillian Ross, the council's finance and accounting manager, laid bare the dire financial situation in a report to be tabled at the upcoming budget setting meeting.
She explained that savings will have to be made and extra income generated through taxation to plug a projected funding gap of £5.065m.
The council report states: "At present the Band D council tax in Dumfries and Galloway of £1,223 is seven percent below the national average.
"Having a council tax below the national average effectively reduces the funding available to support council services in Dumfries and Galloway by £5.4m per annum.
"Having a council tax level below the national average has also in recent years resulted in the council receiving reduced shares of national funding allocations where these have been linked to council tax income levels.
"Each one percent increase in the council tax level will generate additional funding of around £775,000 per annum to support the provision of council services on a recurring basis."
Two years ago, the council faced a funding gap of £10.9m, which was brought down to £5.2m through various cuts.
A tax hike of 4.84 percent was then implemented to help balance the books.
For 2022/23, it was initially feared that Dumfries and Galloway Council faced an £11.7m budget shortfall, however some savings were identified - and the Scottish Government agreed to stump up around £3.4m more.
A letter of complaint signed by every council leader in Scotland was sent to First Minister Nicola Sturgeon by COSLA (the Convention of Scottish Local Authorities).
This prompted negotiations where the Scottish Government agreed to stump up a further £120m to be split among the country's 32 local authorities.
Council leader Elaine Murray said: "Although the additional funding helps plug some of our funding gap this year it doesn't cover it all and, as it's a one-off, it just kicks that part of the problem on to next year.
"The government hasn't provided funding for pay increases, inflation or the National Insurance increases - which were passed on to the Scottish Government by the UK government - although it did so for the NHS."