Tax reforms expose growing divide between productive, FAAC-dependent states

States capable of attracting businesses, stimulating commerce, and formalising informal economic activity are now positioned to benefit more from stronger VAT-linked revenues over time.

By contrast, states with weak industrial activity, narrow tax bases, and low levels of private-sector investment may find themselves increasingly exposed despite temporary gains from higher allocations.

“The new VAT allocation for states essentially means that they are earning more money,” said Dumebi Oluwole, senior economist at a leading research firm.

“This provides additional revenue for state governments to meet statutory obligations such as salary payments and, more importantly, engage in meaningful capital expenditure.”

The shift is being driven by changes in how Value Added Tax (VAT) is distributed across the federation. While VAT is collected centrally, its allocation to states is increasingly influenced by factors such as consumption levels, population size, and where economic activity actually takes place. 

This means states with stronger commercial bases and higher levels of consumption are positioned to receive a larger share of VAT-linked revenues over time. 

“States must begin strengthening their independent revenue capacity,” said Idi Andrew Ivo, a tax expert and chartered accountant.

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According to him, the reforms reflect a broader transition away from volatile oil-linked revenues toward a more structured system driven by domestic revenue generation.

“Nigeria is transitioning from an economy heavily dependent on volatile revenues toward a more structured system driven by predictable domestic revenue mobilisation,” he said.

This shift is being driven by rising VAT receipts, changes to the VAT sharing formula, and broader reforms aimed at strengthening domestic revenue mobilisation.

Under the revised VAT structure, states now receive 55 percent of VAT revenues, up from 50 percent previously, while the federal government’s share has declined to 10 percent. The adjustment increases the fiscal importance of local economic activity and consumption.

At the March 2026 Federation Account Allocation Committee (FAAC) meeting, a total of N1.894 trillion was distributed across the three tiers of government. States received N651.525 billion, while local governments got N456.467 billion.

Out of the N619.119 billion shared from VAT alone, states received N340.515 billion, significantly higher than the federal government’s N61.912 billion share.

The figures underscore a structural shift already underway in Nigeria’s fiscal architecture.

“Taraba, like many states, still relies heavily on FAAC allocations,” Ivo noted, pointing to the vulnerability of states with weak internally generated revenue bases.

That dependence is becoming more consequential as the fiscal system evolves.

To sustain stronger revenues under the new framework, states may increasingly need to prioritise industrialisation, infrastructure development, digital tax systems, and investment attraction strategies rather than reliance on monthly allocations.

Oluwole explained that states that build around their comparative advantages are more likely to achieve long-term revenue stability.

“State governments should invest in commodities where they have a comparative advantage and build industries around those value chains,” she said.

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Such an approach could expand private sector investment, deepen local production, and strengthen internal revenue bases beyond federal transfers.

Infrastructure is also expected to become more central to state-level revenue strategies.

Transport systems, industrial parks, logistics corridors, and agro-processing zones could play a key role in expanding commercial activity and taxable economic output.

However, economists caution that higher allocations alone will not resolve structural weaknesses in many states.

Weak industrial capacity, poor business environments, and limited economic diversification continue to constrain sustainable revenue growth.

Security risks remain a critical constraint

Oluwole warned that insecurity could limit the extent to which states benefit from rising revenue inflows, particularly where private capital formation is required.

Even with improved infrastructure spending, persistent insecurity may discourage long-term investment.

There are also concerns that fiscal pressure could translate into more aggressive tax enforcement at the subnational level.

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As states seek to expand revenues, businesses, particularly small and informal operators, may face rising risks of multiple taxation or heavier compliance burdens.

For many, the concern is not just higher taxes, but whether economic conditions exist to justify them.

Ivo stressed that implementation will determine outcomes.

“The reforms have been designed; the laws have been enacted. The challenge now is implementation,” he said.

He added that effective tax systems depend on trust, transparency, and visible economic outcomes rather than enforcement alone.

“Sustainable tax systems are built on trust, not fear,” he said. “The goal is not intimidation but inclusion.”

As Nigeria’s fiscal reforms deepen, the dividing line is becoming clearer: not between oil-producing and non-oil states, but between states building productive economies and those still dependent on allocations.