In recent discourse, particularly on social media, the fiscal viability of the Nigerian States has become a topic of significant debate. This heightened conversation is largely triggered by two recent developments: the publication by the National Bureau of Statistics (NBS) of the internally generated revenue (IGR) figures of the 36 States and the Federal Capital Territory for 2023: a state’s capacity to generate a significant amount of revenue from internal sources as opposed to revenue derived from the statutory monthly allocation disbursed by the Federal Account Allocation Committee (FAAC) is a great measure of its fiscal viability, thus the significance placed on the annual IGR publications; and the transmission to the National Assembly of the Economic Stabilization Bills, which includes the Nigeria Tax Administration Bill.
The latter aims to underscore the principle of derivation by proposing a rate of 60% in the value-added tax (VAT) allocation formula to the states. This stands in contrast to the current provisions, which distribute 85% of total VAT receipts among the states, allowing a state to retain only 20% of the VAT revenue collected within its jurisdiction. This new provision is expected to see states that typically rank higher on the IGR index, like Lagos and Rivers, earn more from VAT than states that rank lower on the rung. This is because these IGR-rich states are typically the collection points for VAT as they host most corporate headquarters in the country (VAT is a consumption tax but is collected in the state in which the head office of the firm remitting the tax is located) .Despite the provision that VAT will with the passage of the bill, be attributed to the state in which the goods and services will be consumed, it is difficult to see how this will work given the inherent difficulty in determining the point of consumption.
Understandably, the Nigeria Tax Administration Bill’s strong emphasis on the derivation principle has sparked back-and-forth arguments, with some commentators condemning the prospect and others praising it. Supporters have applauded the bill, arguing that it would force governments of states struggling with VAT collection and IGR to reassess their performance, overcome the “laziness” fostered by the “free” monthly federal revenue allocation, and undertake the “difficult” task of fostering an environment conducive to investment and economic activities in their respective regions.
This line of thinking assumes that states’ lack of effort leads to low economic activities and consequently poor revenue generation, but is this really the case? Is the low level of economic activity in most states the fault of the state or federal government? It is my humble submission that the fault lies with the federal government, as the task of engendering economic development in the states falls more on the central rather than the state governments.
A study of the 1999 Constitution of the Federal Republic of Nigeria (as amended) reveals that the federal government is in control of most of the economic levers of the country. For instance, mineral resources, which are a major economic factor in most developing or underdeveloped countries, such as Nigeria, are the preserve of the central government, thereby preventing state governments from exploiting them. The federal government is also solely responsible for the use of fiscal policies such as import duties. This implies that a state, potentially a major wheat cultivator, relies on the policies of the federal government. The federal government can lower import duties on wheat, hindering the growth of this sector. This is because the state’s wheat cultivators cannot compete with cheaper imports from countries with a long-standing history of wheat cultivation. Conversely, if the federal government raises import duties on imported wheat, it can make wheat producers in that state more competitive in the market. This, in turn, encourages them to increase their production, thereby stimulating economic activity within the state. Therefore, the federal government, through its policies and investments, plays a major role in determining the economic viability of states in Nigeria.
The FG’s investments and policies over the years have significantly contributed to the financial viability of the top five states on the IGR table (Lagos, FCT, Rivers, Ogun, and Delta), all of which generate income in the hundreds of billions. For nearly a century, Lagos State served as the nation’s capital, attracting commerce and eventually establishing itself as the country’s commercial capital, a status it upheld even after losing its political capital status. The FCT, which was virtually a virgin land a little over three decades ago, has risen to economic prominence over even the oil-producing states by virtue of it being the current capital with federal investment pouring into it and with the attendant attraction of corporate and commercial entities, thereby boosting its economic viability.
Many, if not most, players in the nation’s mainstay, the oil and gas industry, have their domiciles in Rivers State. Like other minerals, crude oil belongs to the FG, and its policies and investments over the years have led to the development of an industry around it, thereby engendering economic activity in Rivers State. The same situation applies to Delta State. On its part, Ogun State’s proximity to Lagos State, which is no longer suitable for siting industrial plants due to factors like land exhaustion, accounts for the steady rise in the number of factories that have set up and continue to set up there.
Research demonstrates that federal investment and policy decisions directly or indirectly benefit all these highly ranked states on the IGR earnings table. Federal intervention plays a more significant role in economic development than the actions or inactions of their respective sub-national governments. This argument becomes even more credible when one looks at rankings that actually measure state government interventions in the respective economies of their states, such as the Ease of Doing Business Report annually compiled by the Presidential Enabling Business Environment Council (PEBEC). The report grades according to the quality of infrastructure, regulatory environment, transparency, and accessibility of information, amongst other criteria. It is instructive to note that none of the top five earners on the IGR table rank among the top 10 on this list, which is a more accurate measure of the state’s promotion of commerce and general economic activity within their domains. In fact, the reverse is true, as the top 10 states on the PEBEC list, namely Gombe, Jigawa, and Sokoto, among others, rank lowly on the IGR table, thereby reinforcing the argument that the role of state governments in the development of economic activities in their states is rather marginal when compared to that of the federal government.
Having established the fact that the states are largely not at fault for the poor economic outcomes of their respective domains as federal investment and policies are key in deciding their fates in terms of commerce and industry, it is therefore only pertinent and logical that the National Assembly, in considering the Economic Stabilisation Bills, takes cognizance of the financial interest and stability of all Nigerian States regardless of the VAT collected individually from them by the Federal Inland Revenue Service (FIRS). All states of the federation contribute to the sums generated through the purchase of goods and services, regardless of where they collect VAT. Disregarding the monetary concerns of the states could lead to agitation for the extension of VAT to unprocessed agricultural products, which are currently exempt, thereby exacerbating the already debilitating food inflation across the country.
To prevent jeopardising the fiscal health of the overwhelming majority of states and exacerbating the already fragile state of our national economy, I recommend reducing the derivation from 60% to a more practical percentage in the VAT allocation formula.
Nnaemeka Emma Chikezie Esq, writes from Kaduna. He can be reached at 08160378991
