fix the fiscal federalism

Fix the Fiscal Federation

Executive Summary

The Federal government has abrogated to itself massive power over virtually every economic activity in Nigeria. This makes the states and Local Governments useless and makes the cost of running the federal government obscene. A key figure to take away is that the FGN spends 63% on its workers to provide these services to the Nigerian people.

The proposal is for the President to present a Bill to reduce the powers, specifically the fiscal powers of the Federal Government by devolving tax powers to states and Local governments.


What is the problem with Nigeria fiscal structure?

1. The Federal Government legislates and collects all fiscal revenue.

Nigeria is a federal republic In Nigeria, the fiscal power should be based on a three-tiered structure of federal, state and local governments but this is not so. The Nigerian tax system favours the federal government, as pointed out by the Study Group on Tax Reform (2003), the federal government accounts for 99% of the tax revenue in Nigeria.

All fiscal enactment powers are held by the Federal Government e.g. Personal income tax (PIT) is legislated by the federal government, payable by individuals, but collected by state authorities. For concurrent taxation such as the capital gains tax and stamp duties, the federal government retains legislative power, while sharing administrative powers with the states. The federal government has jurisdiction for such taxes as VAT and Education tax. The federal government taxes corporate bodies while state and local governments tax individuals.

The state and local governments have had no freedom to introduce new taxes because matters dealing with taxation are on the Exclusive list of the constitution. They may enact laws only with the concurrence and approval of the National Assembly

Why is this problem?

1. It deprives the states and Local governments the ability to use taxation as a means of earning revenue or attracting investment.

States like Lagos earn almost 80% of their income from the PIT, but they cannot determine the rate to apply to attract investment. The Company Income Tax CIT and the VAT are collected in states. Lagos State may build roads and attract multinationals to Lekki but the federal government will take the revenues generated by these multinationals.

It also put all the states in the same bracket in terms of tax policy. Ogun state for instance cannot use a lower VAT or CIT rate as an incentive to attract investors from Lagos to Ogun. Yobe state cannot declare a tax free zone to attract Dangote Industries to set up a factory there.

States like Lagos also see no incentive to enforce the payment of taxes as these taxes are sent to the centre. The CBN estimates that Lagos has about 60% of the manufacturing and commercial activity in Nigeria. Lagos is the generator of the highest VAT and the highest Customs duty, but it does not see these tax benefits. It is, instead, shared anchored on such factors as equality of states (40 per cent), population (30 per cent), landmass and terrain (10 per cent), social development needs (10 per cent), and internal revenue efforts (10 per cent). This sharing formula, discouraging revenue drive, particularly for federally adjudicated taxes e.g. VAT.


2. The federal government is reckless with spending.

The tax (and revenue) collected is used to pay federal workers.

Take the figures for 2010, the total receipts for Companies Income Tax, VAT and Customs duty was N1.40t (net of cost of collection, gross collection was N1.52t). Let us now look at the total non-debt cost of the federal government (salaries, pensions) that is N2.54t.

In effect, the total tax revenues of the nation are swallowed up by personal cost of the federal government. An argument can be made that oil revenues are actually paying the salaries of the federal workers but keep in mind that non-oil revenues made up 34% of the total revenue in 2010.

In addition, how many federal workers do we have in Nigeria? The federal workers take home 63% of the total revenues of the nation, (tax and oil receipts).

3. It makes Local governments ineffective.

The current fiscal structure created a situation where the Local governments must exist at the mercy of the federal and state government.

Primary schooling is the exclusive responsibility of local governments; the constitution states, “The functions of a local government council shall include the provision and maintenance of primary, adult and vocational education”. We then wonder how Nigerian children can be educated by taxes charged on items such as fees on marriages, motor parks and bicycles.
Unlike States who can charge Personal Income Taxes generate billions of Naira (like Lagos), the Local governments have been “allocated” very poor means of livelihood and are thus unable to serve the citizens of the LGA.


What can GEJ do about it?


• Amend the constitution to allocate to the three theirs of the federation appropriate income-generating taxes to enable them fulfil their constitutional requirements. The federal government cannot simply tax the wealth of Nigeria and spend it on only the federal workers. Such a move will discourage the payment of taxes.

• Devolve most of the powers from the exclusive list to the concurrent and the forth schedule or and duties of the Local governments e.g. Insurance, stamp duties as a whole, and VAT.

• The states and Local governments should share VAT

• States to determine and charge Personal Income Tax

• Local Governments to charge Property taxes, charge, and collect the education taxes

• Pass a law that will cap how much of the federal, state or Local Government earnings can be allocated to recurrent expenditures. This is specifically to forestall a situation where taxes are charged just to maintain the lifestyle of workers.

It’s important to note that The former president of the NBA has presented a private bill to the National Assembly for an Act to alter the Constitution of the Federal Republic of Nigeria 1999 by creation of the States Court of Appeal, introduction of Federal and State Legislative Lists and adjustments/modifications of legislative powers of government between the Federal and State Governments."
Agbakoba said the present "bloated federal system" had made governance too expensive to support any meaningful development in the country.
The bill seeks to replace the "Exclusive Legislative List" with "Federal Legislative List" with respect to powers limited to the federal government and introduced the "State Legislative List" for powers exclusive to the state governments.
Issues recommended in the bill for devolution to the states include natural and mineral resources, excluding petroleum and gas; agriculture; micro finance banks; municipal police, state appeal courts; solemnisation of marriages; incorporation of business enterprises with state objects; taxes on income and profits within states, other than income and profits of companies; regulation of labour and industrial relations at the state level, including prescription of minimum wage; and evidence.

It is our problem and we will fix it.