Is it possible to conceive a state government giving up a $500 million off-budget source of revenue? Former Prime Minister Paul Keating once advised people against standing between a state government and a bucket of money, and nothing much has changed in the 13 years since he was prime minister.

That's the dilemma facing insurers trying to prise the Victorian Government's fingers from around the throats of policyholders.

It's not hard to see the sticking point in the ongoing battle over Victoria's fire services levy (FSL). It's the $500 million the Insurance Council of Australia (ICA) says general insurers will pay the state's government as their contribution to funding the fire services in 2009/10.

The levy on regional businesses rose from a whopping 68% to a sensational 84% in the space of a few months.

For domestic insurance the levy now stands at 31%, up from 26%. Brokers, who have taken the lead in the industry's struggle against insurance taxes over the past few years, are maintaining the rage, and their clients seem to be reacting to the situation with angry letters to the editor and some nasty comments by farmers' groups.

Yes, the system is unfair, discriminatory and a prime example of taxation at its most inefficient. And yes, the latest rises will force even more people into considering insurance unaffordable. The government of Premier John Brumby knows all that.

But they also face an election in November next year, and the ruling Labor Party has to weigh up the impact on the electorate of a big rise in property rates to pay for the services, or the pain of sticking with the present system whereby it's only insurance-buyers who get gouged.

So far the Government is indicating it's more prepared to stick with the levy on insurance policies. Last week Treasurer John Lenders waved a red rag at the state Opposition - which must see the fire services levy as a touchstone in regional Victoria - by accusing it of planning to fund fire services by imposing a "poll tax" on every household in the state.

He described as "disgraceful and dangerous" the Opposition's decision to "play politics with the fire services levy - a crucial source of funds for Victorian firefighting resources".

Perhaps Labor Party research has shown the argument will work with Victorians and dissuade the Opposition from making the levy an issue. After all, previous coalition governments have been happy enough to keep the levy going - and how would State Opposition Leader Ted Bailleau fill the $500 million funding hole, anyway?

While the National Insurance Brokers Association has taken a high public profile on the issue by pursuing media space and educating policyholders, the Insurance Council of Australia appears to be sticking with its behind-closed-doors approach.

Can a discreet campaign of persuasion succeed where publicity and stakeholders' shirty letters to Labor Party MPs are being treated (at this stage) as little more than an annoyance?

On this issue, ICA is big on the figures but entirely absent of a willingness to comment. Last week its spokesman gave a general response to written question from insuranceNEWS.com.au asking where the council stands on the latest increase, and whether or not the levy hike will further compound the underinsurance problems highlighted by the bushfires.

Informed industry sources have told insuranceNEWS.com.au that ICA wants members to mute their criticism of the state government to allow Premier Brumby to be lobbied and persuaded on change rather than backed into a corner where he can't or won't negotiate.

There is no visible evidence that Mr Brumby is reconsidering his hard line, which he reiterated in the Victorian Parliament last month.

But his government is stuck with a growing dilemma. Slugged with a 123% mark-up on insurance which includes the FSL, GST and stamp duty (and sometimes a terrorism levy as well), policyholders - farmers in particular - are limiting what assets they choose to cover or are even not insuring at all.

This trend is shrinking the insurance pool significantly, which can only force the levy higher over time. That has all the signs of a cost spiral making the FSL system increasingly unsustainable.

Submissions before the Henry Review into Australia's future taxation system, including one by ICA, are also urging reform.

But with a government prepared to stare down a skittish opposition that has no commitment to reforming the FSL and no co-ordinated pressure group actions to scare it into action just 15 months from an election, the Brumby government may well be hunkering down. Looking at Mr Brumby's options, he could well now be weighing up the chances that no one in politics wants to make fire services levy into an electoral issue. Time will tell.