The Seaside Resort Renewal Scheme has been blamed for the rise of "city-style housing estates" and deteriorating bathing water quality in Kilkee, Co Clare.
The scheme has come in for criticism following An Bord Pleanala's refusal last month to grant planning permission to three separate multi-million-pound holiday home developments.
The scheme, which offers tax concessions to investors in leisure facilities at 15 resorts throughout the Republic, has been criticised by the Kilkee Planning Review Group for being responsible for an "unbridled proliferation" of properties owned by investment groups.
The group, which successfully opposed a £4 million holiday home development planned for Kilkee, stated in a submission to the Department of Finance, which is currently reviewing the operation of the scheme, that holiday homes should be "omitted entirely from tax concessions in any new scheme".
The scheme, which has been extended to June 1999, has been blamed for "jeopardising all the attributes that have made Kilkee of world renown as a quality tourist destination".
The review group claims that, as a result of a failure to match the "cumulative impact of the holiday home blitz with proper infrastructure", there are water shortages, traffic jams and bathing water is of poor quality.
It has called for greater consultation and for local authorities to have a more "proactive role" in the drawing up of any new scheme. "A major mistake has been made and all concerned must ensure that this does not happen again", the group states.