At the moment, business rates collected locally are pooled nationally before being redistributed to local authorities.
The government is proposing to change this so that business rate growth only benefits the areas where they are collected.
The council said it recognised the government proposeals aimed to stimulate the local economy and encourage councils to fuel business growth
But it fears that rural areas will be put at an immediate disadvantage.
Cumbria's Gross Value Added has been the fastest growing in north-west England in the past six years.
Despite this, the growth in business rates in Cumbria has been below the national average for the five years up to 2009/10.
Furthermore, national non-domestic rates are based on growth in business premises – they are not a measure of the success of the local economy.
Cumbria County Council believes the government's approach proposed is particularly beneficial to areas of large urban collection.
In rural areas such as Cumbria economic growth may come through tourism, leisure and smaller businesses, rather than industry or office buildings, it said.
Across Cumbria, because of its rural nature, small businesses based in residential accommodation are a common business model.
While contributing to the local economy, therefore, they would have a limited impact on business growth as reflected in business rates income.
County council leader Eddie Martin has written to the Department for Communities and Local Government to express his concerns about the changes.
"This is a massive issue for Cumbria," he said.
"The council is fully committed to promoting economic growth and supporting businesses, but the reality is that we're not playing on a level field.
Rural areas often found it difficult to compete with urban areas due to the shape, size and nature of their economy and topography.
"Without this extra support we will see the existing gaps widen and rural areas will be severely penalized," said councillor Martin.
The proposed changes could come in at the same time as other major reforms in local government funding, he added.
They included changes in public health funding, the removal of compensation for councils to freeze council tax, and the council tax benefits changes.
"We are urging the government to think more carefully about the consequences of these changes."
Rural business growth in rural areas is restricted by green belt planning constraints, said councilor Martin.
Restrictions in National Parks such as the Lake District were even more limiting for development opportunities.
The government is proposing to use the 2012/13 formula grant allocations as the baseline to calculate future allocation.
But Cumbria claims this is already skewed against the county because it has already lost over £13m that the government says it needs through 'damping'.
This is the measure by which the government evens out discrepancies across the country so there is a more equal share of grant reductions.