The Cabinet, which is made up of both Letta's Democrats and Berlusconi's center-right ministers, decided to cancel the payments through the end of the year and institute instead a local "service tax" starting in 2014, Letta told reporters.
Hawks in Berlusconi's party had warned that if the tax weren't abolished, the party would withdraw its support for Letta's government. As a result, Wednesday's decision to repeal the tax gives Letta's government some breathing room as it presses ahead with measures to revive Italy's moribund economy.
"This is good news," said Angelino Alfano, Berlusconi's political heir and the vice premier in the hybrid government. "For us it has the value of 'Mission Accomplished.'"
Details of the decree were still being worked out late Wednesday, and it wasn't immediately clear what the substitute "service tax" would mean in real terms for Italians struggling to make ends meet amid Italy's two-year recession and 12.1 percent unemployment rate.
Abolishing the property tax creates a 4 billion euro ($5.3 billion) annual shortfall. Officials declined immediately to give specific details of how that money would be recovered, though Letta stressed that the new "service tax" wasn't a property tax in disguise and that Italy would maintain its international commitments to keep its public debt in check.
Berlusconi had made abolishing the unpopular tax a cornerstone of his campaign before February's inconclusive elections, and the issue gained importance as his own political future was thrown into doubt following his definitive tax fraud conviction earlier this month.
Italy's high court on Aug. 1 upheld Berlusconi's conviction, four-year prison term and a ban from public office.
A Senate committee on Sept. 9 begins deliberating how to implement the public office ban given Berlusconi's current Senate seat. Some of Berlusconi's more hawkish allies have warned that a vote to strip him of his Senate seat would spark a government crisis.
On Wednesday, Berlusconi's lawyers presented their written arguments to the Senate committee arguing that the public office ban for the three-time premier would be unconstitutional. Rome daily La Repubblica posted on its website the opinions of six legal experts that were submitted as part of Berlusconi's case.
Berlusconi is seeking to suspend the Senate committee's work pending a review by Italy's Constitutional Court of the 2012 law behind the ban, Repubblica said. The law stipulates that anyone convicted to prison terms over two years is ineligible to run for office for six years.
Constitutional scholars have been debating for weeks how and whether the law can be applied retroactively to Berlusconi given his current position in parliament.
Berlusconi is also seeking recourse with the European Court of Human Rights, arguing that the ban violates European norms by applying a heavier penalty on him than was applicable at the time of his crime, news reports said.
While some analysts saw Wednesday's deal on the tax as a sign of reconciliation between left and right, others suggested that Berlusconi might actually have been weakened. Winning the property tax fight actually deprives him of an excuse to eventually make Letta's government fall and call early elections, some analysts said.
Now, if his allies make the government fall as a result of the decision on whether he can keep his Senate seat, Berlusconi will be seen as having created a government crisis purely because of his own judicial woes.
"Berlusconi is weaker in front of the Democrats with respect to his personal issues, he's got a card less to play," said Giovanni Orsina, deputy director of Rome's Luiss University School of Government. After this deal, Orsina said, "Berlusconi's game is much more difficult."