An effective solution to the revenue sharing brouhaha

How did Nigeria find itself with thirty six states in a federal arrangement, and functions that should be with states are listed on the federal exclusive list?  It dates back to 1966, and what that year obliterates in the nation’s history has its origin in 1946. That was the time concept of fiscal federalism was […]

How did Nigeria find itself with thirty six states in a federal arrangement, and functions that should be with states are listed on the federal exclusive list?  It dates back to 1966, and what that year obliterates in the nation’s history has its origin in 1946. That was the time concept of fiscal federalism was first introduced in Nigeria,  the time the Regions held on to revenue from export and excise taxes, meanwhile the federal government got only what Lagos area deserved; Regions owned Marketing boards and the hosts had whatever were the boards’ operational surpluses; Hosts also fixed producer prices, and they set sales tax on the produce of the Marketing boards; Regions retained mining rents and royalties, but paid 30 per cent in federal tax to what was then called the distributable pool account (DPA); Regions both administered and retained income tax on incomes that were not above Seven Hundred Pounds per annum, while the federal government collected import duties and corporate income tax; The relationship between the Regions and the provinces were determined by the regional governments. There was a correlation between their relationships and responsibilities with attendant implications, and as time went on, there was an increase in revenue for the Regions which moved from 17.7 per cent of total government revenue in 1945/49 to 41.6 per cent some twenty years later, a period when the share of the federal government declined from 82.3 per cent to 58.4 per cent.  But there were two sharing levels – one was between federal, state and local councils; while there was another between the states and local governments.

When the military suspended the federal constitution in 1966,  it made the federal government take over state and local government functions, and as a result new tax regimes came into being. Legislation as well as administration of mining rent and royalties was moved over to the federal government. The Marketing boards were centralized in the federal government, as well as taxes, surpluses and fixing of producer prices. The federal government did the same thing to  revenue from company income tax, mining royalties and rents, export, import, petroleum profit (PPT) and excise taxes. Uniform rates in personal income and sales taxes were introduced, although the states administered the taxes. Other far-reaching changes were made in the following decades such as the value-added tax (VAT) in 1994 which the federal government also regulated and administered. One negative feature in revenue sharing since 1989, are deductions referred to as ‘first charges,’ and they consist of excess crude oil earnings, external debt service, and cash calls. This is reminiscent of the military era which operated with the mentality that the federal government owned the country and her resources, although the federal government, by the pre-1966 arrangement, is a cooperative endeavour, a federation that different regions sat, and negotiated to form.

There is no doubt that with more responsibilities that the federal government took over, it circumvented effective operation of federalism. Fiscal federalism equally underwent some of the changes that are known today, and they are the same changes that have led to the current controversy over the call from sections of the country for a new revenue sharing formula. Yes, there is a standard arrangement for reviewing the sharing formula at regular intervals, but this cannot continue as it is, and the current debate on how to better share funds cannot just be on how to draw more to sections of the country; a careful examination of the nation’s problems shows that addressing any issue concerning development goes beyond this. For instance, how come Enugu state that receives just about the same amount from the federation account as some states in the North-East corner of the country has more school products that perform well in final examinations in secondary school? How come that some of the states in the South have just about the same annual budget as some states in the North-East, yet a recent survey show the latter to be the most economically impoverished part of the country? Does it make sense that even states that have more funds don’t appear to have any clue as how to tackle some of the more fundamental problems that confront them, including unemployment and security? Part of the problem is that many items that the Regions had the power to deal with in the pre-1966 days have been taken over by the federal government, with the required resources.

This has effects on effective planning, and it leaves open a situation where state governments expend funds on what they have no control over, such as the police. The federal government has control of the fund for that sector, yet state police commands say it publicly that governors of their respective states need to purchase gadgets for them if they must be effective. And a sort of rat race exists among states, too; they undertake projects which impacts can only be effectively felt if they were handled regionally. And most states have become so dependent on oil funds from the federation account that they don’t bother with generating revenue internally. The problems, and the oddities are many, they are fallouts of several years of skewed practices in a structural and operational arrangement that is said to be federal, but in the real sense is over-centralized.

Ajibade wrote this piece from Abuja.   [email protected]