The push for fiscal reform in Nigeria’s states has reached a critical juncture. A recent tax reform bill proposing a derivation-based model for Value Added Tax (VAT) distribution has reignited debates over the fiscal autonomy of states. While some governors, particularly from the north, resist these changes, arguing they threaten regional interests, the reality is clear: the current reliance on federal allocations is unsustainable. If Nigeria’s states are to chart a path toward economic resilience, they must embrace this shift and address the systemic inefficiencies that have long undermined their growth.
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Nigeria’s over-reliance on the Federal Account Allocation Committee (FAAC) has created a precarious fiscal architecture. A BudgIT report highlights that 14 states depend on FAAC for over 70 percent of their revenue. This dependency is particularly pronounced among oil-rich states, ironically contributing significantly to Nigeria’s export earnings. Federal allocations have long been a lifeline, but they also worsen budgetary instability, discourage innovation, and reinforce complacency.
States such as Lagos demonstrate the viability of a different approach. With only 26.55 percent of its revenue sourced from FAAC, Lagos has developed a thriving local economy underpinned by a robust tax base and private-sector growth. This model enables critical investments in infrastructure, education, and healthcare, forming a virtuous cycle of development. The lesson is clear: dependency is a choice, not an inevitability.
For many states, transitioning from federal reliance to internally generated revenue (IGR) presents significant challenges. Regions such as Zamfara and Katsina, with weak industrial bases, face steep hurdles in expanding their tax base. Agricultural states like Benue, despite their vast resources, suffer from a lack of processing facilities to transform raw produce into high-value goods. These structural deficits underscore the need for targeted investments in infrastructure, agro-processing, and industrial development.
At the same time, achieving fiscal independence requires tackling systemic inefficiencies. Informal economies, which dominate many states, escape taxation, while weak governance and corruption undermine revenue collection. Addressing these issues demands bold leadership, effective governance, and a long-term commitment to reform.
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The proposed derivation-based VAT model offers a lifeline for states to recalibrate their revenue systems. Under the plan, 90 percent of VAT would be allocated to states and local governments, with a significant portion distributed based on consumption patterns. While this approach has drawn criticism from regions that fear losing federal support, it incentivizes productivity and fiscal responsibility, encouraging states to maximise their economic potential.
“Federal allocations have long been a lifeline, but they also worsen budgetary instability, discourage innovation, and reinforce complacency.”
This transition is not merely a fiscal necessity; it is a political and social imperative. With over 18.3 million children out of school and 133 million Nigerians living in multidimensional poverty, states cannot afford to maintain the status quo. Investment in human capital, alongside reforms in taxation and governance, is essential to build a workforce capable of driving sustainable economic growth.
Nigeria is not alone in grappling with fiscal centralisation. Countries like Brazil and India have faced similar challenges but have shown how regional governments can thrive with the right mix of decentralisation and accountability. For example, Brazil’s São Paulo state has leveraged its industrial base to build a diversified economy, while India’s Kerala state has made significant strides in human development by prioritising education and healthcare.
These examples offer valuable lessons for Nigerian states: success hinges on strategic planning, effective resource management, and inclusive policies that prioritise long-term development over short-term gains.
Nigeria’s governors must recognise that fiscal reform is not a threat but an opportunity. Reducing reliance on FAAC requires painful but necessary adjustments, such as enhancing tax systems, curbing waste, and creating environments that attract investment. States that embrace these changes will not only secure their futures but also serve as models of innovation and resilience for the entire nation.
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To achieve this, state governments must prioritise tax reform by implementing efficient and equitable tax systems to broaden the tax base and increase revenue collection. Strengthening financial management systems to ensure transparency, accountability, and prudent resource allocation is also crucial. Investing in critical infrastructure, such as roads, power, and water, to stimulate economic growth and create jobs is essential. Prioritising education and skills training to build a skilled workforce and enhance human capital is equally important. Finally, creating a conducive business environment to attract domestic and foreign investment is necessary to drive economic growth.
By taking these steps, Nigeria’s states can unlock their full potential and build a prosperous future for their citizens. The time for action is now.
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