Instead, in one pocket of inner Melbourne, it's making life harder for motorists - and doing nothing for public transport.

Traders in Smith Street, Fitzroy, began receiving notices this week from their local Yarra Council that a small car park leased for many years will shut on December 31.

The council blames the state government's congestion levy, introduced in 2006 to encourage public transport and ease traffic in the Melbourne CBD.

At the start of 2015, the tax was widened to several inner-city areas, including parts of Fitzroy, St Kilda, Albert Park and Footscray. But unlike in the CBD, the council areas affected got nothing in return to help pay for public transport improvements.

Each off-street parking space outside the CBD deemed part of the taxable area now attracts a levy of $950 per space.

Yarra Council had leased the tiny Condell Street car park from its owner for $52,000 a year.

But with its 25 parking spots adding an extra $23,750 a year to the bill, the council tried passing on the added costs to drivers.

With the fee increased to cover the cost of the congestion levy, the number of drivers using the car park plummeted.

Now, the council has decided to dump the car park altogether, and hand the land back to Mirabay Pty Ltd, the company that bought it for $5 million in 2007, and that had leased it to the council.

Local councillor Jackie Fristacky said it was a perverse outcome that a tax introduced to support public transport was doing nothing but closing car parks.

"When it was introduced for the CBD, it was supported because money was going back into sustainable transport," she said.

But having widened the levy to cover inner Melbourne council areas like Yarra and Port Phillip, which covers St Kilda and the inner city bayside area, had meant money they raised went straight to general revenue.

"And there is no linkage with improving things like bike paths or public transport," Cr Fristacky said. "There is zero return to us for this and this car parking is going to be closed purely because of this levy."

The Property Council has been a long-running opponent of the tax, and its executive director Jennifer Cunich said the closure of a local car park was "yet another example of a bad policy idea becoming a bad property tax".

"The local community will now pay the price for the state government's property tax addiction," she said.

Treasurer Tim Pallas said the car park fell within the expanded congestion levy boundary - introduced by the former Coalition government.

"The precinct is well serviced by public transport, and council itself states it's unlikely that parking services will be adversely affected by this decision," Mr Pallas said.

Yarra mayor Roberto Colanzi said his council wanted 15 per cent of the parking levy collected by the state government for transport projects.

Yarra Council borders Melbourne City Council, which last financial year collected $7 million from the state government's congestion levy, which it is using for projects such as streetscape upgrades, footpath improvements and bike paths.