WE NEED FISCAL FEDERALISM. WE NEED IT NOW

At independence, the country of Nigeria was run on a regional structure: the Northern, Western and Eastern Regions with a central government. The regions were in charge of providing all government services and only ceded the role of the armed forces, railways and foreign relations to the central government. That said, it reduced the powers at the centre and also introduced competition between them. They were able to do this by sending only a percentage of their earnings through taxing activities in their region and keeping the chunk.

However, in the aftermath of the coups of 1966 and the Nigerian Civil War, the military governments slowly stripped the regions of their powers, even as they were creating states. The school of thought that supported this was based on the belief that one reason the Eastern Region was able to attempt a break away was because of the revenues they had. Therefore, in other to squash any possibility of secession by any other region, the military government decided to whittle down the powers of the federating units while increasing theirs.

Even though Nigeria transmuted to a federal structure in 1979, modelled after that of the United States, which is best considering our multi-ethnic, multi-religious state, this federalism exists largely on paper only. The Exclusive List in our constitution which specifies those things only the Federal Government should do has way too many items, as against the Concurrent List, which both the states and the centre can handle. There is an urgent need to truly divest power from the centre and make them less of the errand boys they are presently of the centre. Like the way Lagos State Governor, Babatunde Fashola puts it, “in a federal structure, it is the states that decide which powers to cede to the Federal Government, and not the other way round.”

However, for the basis of this article, I will focus only on the fiscal part of federalism – the money-generating and sharing component. In our tax structure today, each level of government has been assigned custodian of certain taxes. All mining, petroleum royalties, company income tax and value-added tax on products and services go to the Federal Government. States receive personal income taxes and business premises taxes while the local governments receive tenement rates (markets).
This, in my opinion, is a very faulty arrangement. To start with, VAT should accrue to the states because it is in those states that the goods and services being taxed are being produced. It doesn’t make sense to pool all the VAT at the centre before sharing it down. This means that a state like, say Zamfara, who due to its implementation of the Sharia law, and therefore does not allow breweries in the state, would still share from the VAT on beer products from Lagos State. That is robbing Peter to pay Paul. If all such taxes accrue to the Federal Government, what then is the incentive states have in order to truly develop their economies? Also, knowing that no matter what, a state would get its monthly federal allocation, there is no impetus for the states to develop and harness the wealth of resources they have, both human and material.

In my opinion, VAT, mining and petroleum royalties should be divided between the states and the Federal Government via a sharing formula, say 70:30. Then, all royalties found off the shores of Nigeria should go to the Federal Government exclusively, as they are not within the borders of any state. Taxes on the incomes of companies should exclusively be that of the Federal Government.

How would this affect Nigeria? Let us look at it one at a time

    Economic Effects: Admittedly, many states would experience a large shortfall in their allocations. At present, only Lagos, Rivers and maybe one or two other states have large enough self-generated revenues to exist without federal allocations. However, this is exactly what we need to jumpstart our economy. Unless the economies of the individual states develop too, the national economy will keep teetering at the brink of collapse. We have to recognise that the sum of the parts is greater than the whole. But I do not see this happening as long as these states are being spoon-fed by the Federal Government.

    Liken this to a child who till adulthood still has all his needs met by his parents, even to middle age. Unless the parents make the drastic move of cutting him off to a large extent, he shall never learn to fend for himself. This is the situation we have in Nigeria. Each state has more than enough to develop. When you consider the fact that only 10% of our arable land is being used for agriculture, you can then begin to imagine the enormous potentials in just this single sector.

    The country of Morocco in the year 2007 earned about $80m from neem products. [Neem is an evergreen tree that can survive in arid regions and is very common in the North]. Kebbi State has six times the number of neem trees as Morocco, which means they can potentially earn $500m from these trees. However, they did not and have not earned a single kobo from this industry. But with fiscal federalism, Kebbi State would have to look inwards and develop itself in all ramifications, especially according to its comparative advantages in relation to the rest of the country.

    The same goes for every state in Nigeria. Admittedly, a state like Jigawa might not be able to rake in as much as revenue as Lagos State, but it has more than enough to lift its entire people out of the doldrums of poverty. What they all need is a kick-start; to be weaned off the milk of the national treasury would be that single kick that will them get going.

    Fiscal federalism would introduce competition between the states, and in an excellent way. In the USA after which we modelled our structure, theoretically, the State of Texas, despite its thriving oil industry, is the 3rd richest state, after California and New York. This shows that the two states ahead of it developed their local economy using what they had in advantage to the others. The same goes for India, where states individually develop their local economies and compete against each other, rather than pooling all the revenues at the centre and sharing them downwards. Such an arrangement makes everyone pull their weight and does not conceal inefficiency.

    In the first few years, lesser-earning states would surely struggle. But they shall gradually pick up. Remember, it is at the edge of the cliff we learn to innovate. Necessity is the mother of invention.

    What the FG can then do is to make up for up to 50% of the average-lost revenues by way of allocation. That way, it can cushion the fall until they get on their feet.

In my next post, I shall talk about the political and socio-cultural effects of implementing fiscal federalism.


9 Comments on this post

  1. This is a good one pls keep me informd on any such post pls. Keep it up

    Asura / Reply
  2. Its high time every state go bark to whatever it has, like the natural resources, restructure it broken factories and recreational centers. Enhance it uses and maintenance, create ways of recycling it west to regenerate other useables. This will help put the economy bark together too. Excellent work Mark. Job well done!!

    Maina Bwala / Reply
  3. Good idea. Its like when competition between east and west Germany resulted in Trabant and Mercedes-Benz respectively.

    How can fiscal federalism be extended to the government owned utility companies like PHCN (or whatever its name is now) and Nitel? After all “spoon feeding” seems to be the habit of Nigerian Government

    bilnigma / Reply
  4. […] in Nigeria and what its economic, political and socio-cultural effects will be in articles here, here and […]

  5. Nice one there.shouldn’t we commerce,history and government important subjects in our schools rather than some foreign languages as it’s been done today in schools? I must tell you,it’s like I’m reading some clear pictorial reps.thanks.

    Sarumi / Reply
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  7. […] of oil from the centre. In other words, it is about time Nigeria became a truly federal country, economically and […]

  8. […] believe in dearly – fiscal federalism [See articles I have written about fiscal federalism here: 1, 2, 3,]. His plans might be                        inadequate but it is far better than […]

  9. […] silver bullet I know for solving our retarding situation. I believe true and fiscal federalism will free up states to grow economically by building a tax-based society and will have multiplier effects into our socio-political lives and […]

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