Nigeria is an acclaimed federation, yet its revenue mobilization model contradicts that of a true federation. States in Nigeria totally depend on the federal government for allocation from the federation account and whenever they are in a fiscal mess, they seek a bailout. This malaise in states is caused by the upper echelon tax collection domiciled with the federal government.
Taxes in Nigeria can be grouped into federal taxes and state taxes. Federal taxes include VAT, company income tax, education tax, etc. and state taxes are personal income tax, business premises tax, and development levy. It is clear that tax mobilization is skewed to the federal government despite the fact that companies and businesses that pay taxes to the federal government draw from infrastructural resources developed by the state government.
Why should the federal government keep collecting taxes when it already houses the mainstay of the Nigerian economy – proceeds from crude oil? It seems to be a pointless strategy detrimental to the economic survival of states. In fact, tax mobilization is still at a low ebb because state governments are not allowed to manage the full scope. Competitiveness among states can be revived by allowing states to collect their own non-personal income taxes and use it to develop their states instead of the federal government taking up this responsibility
Recently, the federal government raised the VAT from 5% to 7.5%, a move I consider unnecessary to financing our persistent budget deficit. VAT is collected by the federal government through the FIRS and shared across states alongside proceeds from crude oil, but this does enable competitiveness among states. While some states like Lagos would have high VAT revenues, others like Zamfara would have less; yet, Lagos’ revenue must be shared with Zamfara. No doubt, this practice supports poor states, but it makes them lazy and unproductive.
There is a timely need for states to be competitive to project Nigeria as a federation. Instead of the federal government looking for foreign investors, the states can take up this responsibility to foster healthy competition. However, allowing the state government’s collection of VAT and CIT is an incentive to absorb this responsibility. No state governor will want to travel abroad and bring in foreign investment, only for the federal government to reap all the tax benefits and then share this with other states that are doing nothing.
It is possible that the federal government refuses to release control of CIT and VAT collection for political reasons; there are other propositions to encourage sub-national competitiveness. To start with, the federal government should adopt a derivation formula for sharing VAT revenue like that of crude oil. This would suggest that states that raise more VAT proceeds will receive more VAT allocation. This should spur other states to grow their VAT base.
In the case of company income tax, which appears to be fully utilized by the federal government alone, it is important to provide states where most of these companies reside with some incentive. For instance, the federal government can allocate 20% of CIT collected in the first ten years of operation to states where the companies are located. This way, state governors will hustle to get more companies into their state. Indirectly, the challenge of low industrialization and unemployment can be abated.
To conclude, the federal government has failed to create a competitive atmosphere among states and this has led to the loss of billions of potential investments; states are not growing evenly and governors cannot think of innovative ideas to raise revenue. While this paper supports the federal government retaining its collection of petroleum taxes and royalties, CIT and VAT should be relinquished to the state governments and personal income taxes to local government to encourage fiscal revenue autonomy and subnational competitiveness.
Written and edited by Michael Ogunremi