Recently, the news broke that Northern governors opposed a proposed tax reform bill, describing it as “against the interest of the North and other sub-nationals.” This bill introduces a derivation-based model for distributing Value Added Tax (VAT) revenue, and it is currently awaiting approval by the National Assembly.
According to Nojeem Yusuf, a UK tax expert, “Derivation means VAT returns to where it was paid by consumers.” Under the proposed VAT arrangement, 10% of VAT revenue would go to the federal government, while the remaining 90% would be divided among states and local governments (55% to states and 35% to local governments). Of this 90%, 54% (60% of the 90%) would be allocated by derivation, meaning it goes back to the regions where VAT was paid. The remaining 36% (40% of the 90%) could be distributed based on other criteria such as population or equal distribution.
Though this new model has sparked considerable controversy, it should be seen as an opportunity for states to increase productivity and reduce reliance on federal allocations.
The Dependency Trap: Overreliance on FAAC
A recent report by BudgIT paints a troubling picture: fourteen states would struggle if the Federal Account Allocation Committee (FAAC) ceased payments today. These states, which rely on FAAC for at least 70 percent of their revenue, would struggle to cover essential costs such as salaries, pensions, and gratuities.
It’s even more concerning that many of these FAAC-dependent states are oil-producing, contributing 70 percent of Nigeria’s export earnings. As Imran Wakili noted on social media, “If FAAC were abolished, resource-rich states would move towards resource control. This would allow them to retain their resources and potentially thrive independently.”
Other voices support this view, emphasising that if federal allocations vanished, oil-producing Niger Delta states could become self-sufficient and quickly develop, driven by local resource control.
Breaking Free: Can States Generate Sufficient Internal Revenue?
Many governors have been criticised as “lazy” for failing to generate sustainable internal revenue. But the question remains: do they have the capacity to increase revenue on their own? Most Nigerian states are rich in natural, mineral, and ecological resources, but only a few tap into their potential.
For instance, Taraba, Niger, and Benue states are endowed with vast arable lands and ecological resources. However, a significant portion of their agricultural output is lost due to inadequate storage, poor packaging, and transportation issues, according to USAID.
Michael Omolayole, former Managing Director of Unilever and a Vision 2010 committee member, highlighted that Nigeria has not maximised the value of its agricultural products. “Instead of adding value to our raw materials, we sell them at low prices and import finished goods at higher costs,” he said.
Agriculture, which employs 30.1 percent of Nigeria’s labour force, offers little economic security because the sector remains largely unproductive, with wages too low to lift workers out of poverty, according to the World Bank.
In many northern states, agriculture is the primary occupation, but the absence of agro-processing plants limits economic potential. Benue state, for example, produces abundant oranges, mangoes, yams, and more, yet lacks factories to process these crops into high-value products. By processing agricultural products locally, states could command higher prices and create a viable market.
Creating a Business-Friendly Environment
For states to attract investment, governors need to foster a business-ready environment. This means ensuring security, safeguarding private investments from illegal taxes, and protecting land from encroachment. Some states are taking promising steps in this direction.
The Lagos State Government recently invited independent power producers to bid on establishing gas-fired power plants to alleviate its electricity shortfall, and Ekiti state granted operational licences to 14 electricity investors to boost power generation.
These efforts, aimed at improving infrastructure, are crucial, as high electricity costs comprise 35-40% of total expenses for Nigerian manufacturers, according to the Manufacturers Association of Nigeria (MAN).
Governments alone cannot provide all the jobs needed, but they can create a conducive environment for private sector growth, leading to job creation both directly and indirectly. Increased consumer consumption of processed goods would boost tax revenue, grow the local economy, and improve the states’ GDP.
Investing in Human Capital and Infrastructure
Nigeria currently has 18.3 million out-of-school children, while 133 million people live in multidimensional poverty, according to UNICEF and NBS. Prioritising infrastructure and education to address these socioeconomic challenges should be the main concern of the Governors.
Dilapidated classrooms, teacher shortages, and poorly maintained roads affect communities across the country, and the states’ response will determine the quality of life and opportunities available to their citizens.
By collaborating with the private sector and supporting local industries, governors can boost their states’ GDP, make VAT derivation more competitive, and gradually reduce dependency on federal allocations.
This is the new reality for state governors, and adapting to it will be crucial for sustainable growth in Nigeria’s federated economy.
