For several years, the three tiers of government in Nigeria –federal, state and local governments have relied on funds from the central pool (federation account) for the running of their governments and provision of basic infrastructure. Only very few of them make extra effort to harness their internally generated revenue (IGR) sources.
Coincidentally, available date indicates that there is a correlation between higher federal revenue allocation, IGR and development. For instance, two states with highest revenue generation namely Lagos, Rivers and Akwa Ibom, have made greater impact on the lives of the citizens than the other rent-dependent states such as Jigawa, Imo, Sokoto etc
In 2020, Federation Accounts Allocation Committee (FAAC) revenue to the Federal Government, 36 states and 774 local governments was N7.14 trillion in the eleven months (January to November). Of this amount, Federal Government received N2.8 trillion, states received N1.96 trillion and local governments received N1.47 trillion. The remaining N91 billion was shared among oil producing states as derivation allocation and the revenue generating parastatals of the Federal Government.
Top five states with highest FAAC allocations in first half of 2020 were Delta (N111.8 billion), Lagos (N50.034 billion), Akwa Ibom (N93.05 billion), Rivers (N88.3 billion) and Bayelsa ( N70.5 billion).
States with lowest FAAC allocations within the same period were Cross River (N24.3 billion), Gombe (N24.4 billion), Osun (N25.5 billion), Plateau (N25.8 billion) and Ogun (N26.9 billion).
In the same vein, the National Bureau of Statistics (NBS) published internally generated revenue (IGR) at state levels for half year 2020. The 36 states and FCT IGR figure was N612.87 billion in first half of 2020 compared to N693.91 billion recorded in 2019. This indicates a negative growth of -11.7 percent year-on-year. Similarly, the second quarter of 2020 states and FCT IGR figure was N259.73 billion compared to N353.14 billion recorded in first quarter 2020. This indicates a negative growth of -26.5 percent quarter-on-quarter.
Lagos State dwarfed others to the top spot, with IGR of N204.51 billion between January and June 2020, accounting for 33.4 percent of the total states’ revenue during the period. Rivers State followed with a total revenue of N64.59 billion, representing 10.5 percent of total revenue generated by the states in the review period.
Other states include; Abuja with N35.21 billion, Delta State (N30.84 billion), Ogun (N23.68 billion), Oyo (N17.77 billion), Kano (N17.51 billion), Akwa Ibom (N16.21 billion), Kaduna (N14.55 billion) and Edo State (N14.01 billion).
On the flip side, Jigawa State generated the least IGR with N3.01 billion, followed by Ekiti State (N3.21 billion), Adamawa (N3.75 billion), Gombe (N3.79 billion) and Yobe (N3.92 billion). Incidentally, the later are among the least developed states in the Nigeria.
Interestingly, there is a link between higher income and development. States such as Lagos, Rivers, Ogun, Delta and the FCT are leaders in the development index. These include such areas as; public works, transportation, public service salaries and wages, infrastructural development, educational advancement including number of educational institutions and student enrolment, healthcare system, roads network, water and sanitation among other performance indicators, as shown in various reports by the National Bureau of Statistics and the World Bank.
Deeper causes of reliance on monthly federal allocation are rooted in oil. Its discovery in the then Eastern Region in 1958 caused the practice of returning mining rents to their origin to be discontinued in favour of sharing them through a federally managed account. The colonial administrators’ overriding concern was that an exponential increase in oil revenues to any one region would upset the balance of national development. The so-called derivation principle was thus dropped in favour of considerations of population and balanced development. This marked a shift in how regions approached their financing. Up till then, regions considered and implemented schemes to increase revenues with more vigour; invariably these involved increased taxation of economic activity.
Today, the FG receives half (52.68 percent) of (mainly oil and Value Added Tax) revenues accruing to the federation account. State governments receive 26.72 percent, while local governments receive 20.60 percent. The disbursement is overseen by the Federal Accounts and Allocations Committee (FAAC). Between states, revenue is shared based on two kinds of principles. One ensures that a relatively fixed proportion is given to each state, i.e. share of revenues allocated is fairly constant over time. Most revenues are shared in this way. Such principles include equality, on which 40 percent of revenue is shared; population (30 percent) and landmass and terrain (10 percent).
The other set of principles depend on state performance in revenue generation (10 percent), social development (2.4 percent), primary school enrolment (0.8 percent), health (3 percent) and water conditions (3 percent). Finally, 13 percent of oil revenue is shared between oil producing states according to their contribution (a reinstatement of the derivation principle). This disbursement does not go through the federation account.
IGR comprises of Pay-As-You-Earn taxes (a form of progressive personal income taxation), Direct Assessment taxes (self-reported personal income taxation for entrepreneurs), Road Taxes, revenues from ministries, departments and agencies (MDAs), and other taxes. Pay-As-You-Earn (PAYE) and Direct Assessment consistently form most of IGR collection.
Fiscal theories of the state are marked by their emphasis on the fiscal relationship between national and sub-national governments as an important variable explaining political outcomes; in this case, tax collection and public spending. These variables are regarded as political because in the fiscal theories’ tradition, tax collection partly determines government responsiveness: since collecting taxes requires quasi-voluntary citizen compliance, leaders are incentivized to create avenues of political participation.
One reason state governments spend locally raised revenues (IGR) more efficiently than allocations is because IGR induces greater scrutiny and willingness to punish government. States like Lagos, Rivers, Delta and Ogun with high IGR are developing rapidly than those with lower IGR because the governors must show what they are doing with the local taxes collected, else the people will revolt.
On the other hand, a development economist, Roseline Aggrey, contends that states with little efforts at generating IGR could be doing so to discourage scrutiny when federal allocations are sufficient. According to her, citizens get more agitated when asked to pay taxes if they do not see tangible done with previous taxes by the government. But the same emotion is not displayed on federal revenue which she said often is shrouded in secrecy.
“In some parts of the world, leaders are compelled to create social contracts with their citizens to gain the compliance necessary for taxation, such taxation incites citizens into greater scrutiny of the government.
“Since scrutiny can expose government misdemeanour and damage re-election prospects, taxation is costly” Agrrey said
When governments can bypass the creation of this social contract through access to allocations, they respond to incentives that are detached from public wellbeing and are able to purchase support from key constituencies where necessary.
Experts are of the opinion that some state governments avoid IGR which is synonymous with direct taxes because IGR is thought to be most effective in inducing citizen ‘voice’, perhaps because indirect taxes are included in the prices of goods and are thus “hidden” and may be systematically underestimated by the electorate compared to direct taxes.
“I expect that when some states receive substantial allocations they expend less effort in collecting taxes within their jurisdictions”, said Emeka Akalazu, a taxation lawyer.
The fact remains that a federal allocation windfall will cause both recurrent and capital expenditure to increase. What would happen if states were to receive substantial IGR? With an increase of IGR in the budget, the government would have an incentive to be better behave since scrutiny will go up. An IGR increase would also represent enhanced fiscal autonomy. This would mitigate the so-called governance-trap (a situation where politicians and the electorate blame subnational fiscal woes on the centre), further strengthening the incentive to spend prudently.
Similarly, experts are of the opinion that with spike in IGR, recurrent expenditure would likely go down since increased scrutiny reduces incentives to sustain a bloated public service. This is because most often, employment and remuneration are increased as a means of sharing rents. Correspondingly, capital expenditure (public investment) is expected to go up, in response to increased scrutiny and less room for blame-shifting.