By Franklin Iyamah | Although Nigeria’s variant of fiscal federalism evolved largely as a mechanism for managing ethnic competition and conflict, its current form—built around highly accommodative revenue-sharing arrangements—has produced a weak socio-economic model.

In well-functioning federations, governments that spend are compelled to tax, and governments that tax are accountable to taxpayers. Fiscal choices carry political cost at the margin. Nigeria reverses this logic as politicians at the federal and state levels “share” centrally-collected revenues without the matching spending responsibilities, resulting in the so-called Vertical Fiscal Imbalance problem of public finance theory. In many states, a large share of spending is financed from a central pool, while political leaders face local voters. Thus, the benefits of public spending are visible locally but the political cost of raising taxes is easier to avoid. This incentive structure affects not only state governments but also the Federal Government, which receives the largest share of statutory revenue from the Federation Account and makes major spending choices of its own. 

Crucially, Nigeria’s present model of fiscal federalism was more politically sustainable for an era when oil could carry a larger distributive burden across the federation. That era appears to be fading. Oil receipts no longer have the fiscal weight they once had relative to the needs of Nigeria’s large population, rising security pressures, and bulging infrastructure deficit. As that old revenue base becomes less able to support an expansive sharing system, the weaknesses of the present design become harder to ignore. Continued denial by Nigeria's political class is widening the gap between citizen expectations and the fiscal system meant to serve them. The tiers of government closest to citizens’ day-to-day needs carry much of the burden of delivering visible public goods and services, yet the strongest revenue handles remain concentrated at the centre. This is why debates about “restructuring” often focus on powers—policing, local governance, devolution—while the harder fiscal questions remain unresolved: who should raise the money that funds the services that citizens expect, and how should the federation protect service delivery when shared revenues fall?

The consequence is growing political tension around the present system, especially over the allocation of centrally-collected revenues, the powers and responsibilities of states and local governments, and the wider constitutional balance of the federation. The macroeconomic implications of this arrangement are significant. A substantial body of empirical literature suggests that spending decentralisation without matching revenue autonomy weakens fiscal discipline and slows long-run growth. In developing federations, such misalignment can also widen regional inequality where transfers distribute rents more than they equalise fiscal capacity. Over time, subnational governments risk becoming dependent rather than developmental.

This paper reviews Nigeria’s current fiscal federal framework and highlights the weaknesses that flow from the present design. It then proposes a practical package of reforms focused on stabilisation, transfers, taxation and spending responsibilities. It argues that the core reform challenge is straightforward: Nigeria must look to rebuild the connection between spending decisions and revenue responsibility, while redesigning intergovernmental transfers to stabilise services and equalise fiscal capacity. If that alignment is not achieved, Nigeria will continue to experience the same cycle—ambitious budgets, weak delivery, mutual blame among the tiers of government, and recurring political demands for restructuring—without a durable improvement in growth or development. 

 Historical Background to Nigeria’s Fiscal Design

Nigeria’s revenue-sharing history is best understood as a long argument between two ideas. The first is reward: revenue should follow origin, effort or burden. In Nigerian practice, this usually meant derivation, independent revenue powers, or later small rewards for internal revenue effort. The second is remedy: revenue should be used to correct imbalance, hold the federation together, and ensure some minimum standard of development across unequal units. In practice, this meant population, need, even progress, balanced development, equality of states, social development factors, special funds and, later, constitutional allocation principles. Nigeria’s present arrangement is a compromise between these two logics, but the balance has shifted over time. 

Pre-independence, the first fiscal commission was the Phillipson Commission of 1946, set up after the enactment of the Richards Constitution of the same year which officially introduced federalism to Nigeria and created three regional governments (North, West and East). The primary goal of the Phillipson Commission was to provide the regions with independent revenue sources to match their new constitutional responsibilities. In principle, the commission recognised three cardinal principles: derivation, even progress and population. But in practice, it relied mainly on population because the data needed for the other principles were weak. The formula prescribed for central revenue distribution was as follows: Northern Region (46%), Western Region (30%), and Eastern Region (24%). The commission's work was a foundational moment in Nigerian fiscal federalism. While it introduced principles that are still debated today, its emphasis on derivation created significant controversy in Nigeria's multi-ethnic society and set the stage for future commissions to refine the formula. 

The Hicks–Phillipson Commission (1951) was established to remedy the problems of the 1946 commission and align revenue-sharing with the Macpherson Constitution of 1951. Its central departure was the recommendation for regions to have independent revenues rather than relying on central government disbursement. Its recommendations were structured around four principles: independent revenues, derivation, need, and national interest. Regions gained direct taxing powers and full control over the following taxes: the jangali (cattle) tax, motor vehicle and liquor licenses. Derivation retention rates were set on various taxes, e.g. tobacco import/excise duties (50%) and petrol (100%). Capital grants using 1931 population figures addressed regional disparities, while national interest provisions had the central government covering police (50–100%) and education (100%) costs. The commission was pivotal for establishing the idea that regions could raise their own revenue (a hallmark of true federation). However, the formula remained contentious with the Western Region, buoyed by cocoa revenues, pushing for greater weight on the derivation principle. This pressure was a major factor that led to the next review. The Chick Commission of 1953 swung sharply back toward reward. Under pressure from the regions, especially those with stronger revenue bases, it made derivation dominant and returned 100 percent of mineral royalties to the region of extraction. This was the high point of regional fiscal autonomy in Nigeria’s history. Interestingly, the formula was basic and unanimously agreed upon at the 1953 constitutional conference in London and there was 100% retention on mining royalties. At this time, the key minerals were tin, columbite, and coal.

The decisive turning point came on the eve of independence with the Raisman Commission of 1958. Raisman was responding to a clear dysfunction: pure derivation risked making some regions too strong, others too weak, and the centre too fragile to hold the federation together. The commission therefore cut back the dominance of derivation, created the Distributable Pool Account (DPA), and introduced a more explicit remedy logic based on continuity of government services, minimum responsibilities, population and balanced development. On mining rents and royalties, for example, only a portion continued to go to the region of origin, while part went to the centre and part to the common pool. In historical terms, this was the beginning of Nigeria’s long movement from a derivation-heavy federation toward a pooled and increasingly centralised revenue system.

After independence, the Binns Commission of 1964 largely stayed within the Raisman framework. It increased the share of revenues going into the DPA and used the principle of “financial comparability” to allocate revenues among the four regions (the three older regions and the newer Mid-West Region). This was another remedy move: the priority was not to reward where money came from (derivation), but to preserve comparability among unequal units in a changing federation. The Binns formula had a short lifespan. The military coup of January 1966 and the subsequent civil war would soon upend the regional structure entirely. The military regime that followed would introduce a far more centralised system through decrees, effectively sweeping away the remaining elements of regional fiscal autonomy.

By 1968, Nigeria was deep in civil war. The military government had abolished the four regions and created 12 states in 1967, requiring a complete rethinking of fiscal relations. Chief I.O. Dina (the first Nigeria to head an adhoc revenue commission) was appointed to lead an interim committee recommending a system suited to this new reality. Key proposals included a Joint Account (in lieu of the DPA) for pooling all federal and state revenues, with a central agency disbursing allocations to all tiers. The derivation principle was to be significantly downplayed in favour of balanced development and need — particularly for less developed areas. Though ultimately rejected by the states, the Dina Report proved influential. Its ideas of a dominant federal government allocating via a joint account based on need foreshadowed the centralised fiscal structure the military would impose by decree in the 1970s. It accelerated the decline of derivation and cemented "need" and "even development" as primary allocation criteria — a trend that has persisted to the present. The states' rejection itself was telling: newly created and eager to assert autonomy, they saw the report as entrenching federal control and threatening their nascent status.

The oil-boom era of the 1970s and early 1980s turned the revenue sharing debate into a more technical system. The Aboyade Committee of 1977 did not simply choose between derivation and need; it tried to build a formula from weighted principles. Among its key recommendations was the creation of a Federation Account: a central pool for the consolidation of all federally-collected revenues (oil, taxes, duties) that survives to this day. In addition, it created an allocation framework which combined several remedy principles—equality of access to development opportunities (40%), national minimum standards (15%) and absorptive capacity (40%)—with reward principles such as independent revenue and tax effort and fiscal efficiency (5%). The committee also recommended how revenue should be shared among the three tiers of government: FGN (60%), States (30%) and Local governments (10%). This vertical formula reinforced the dominance of the federal government, which was consistent with the centralised military structure of the time. The committee’s prescription was conceptually important because it moved Nigeria from broad political principles to a more quantitative model, but it was rejected as too technical.

In addition, it ended the principle of derivation which was vehemently opposed by the oil-producing states, particularly in the Niger Delta, which saw it as a fundamental injustice. Due to these controversies, the military government of General Olusegun Obasanjo did not implement the Aboyade recommendations. Instead, it handed the report to the next civilian administration, which then set up the Okigbo Commission to review and simplify it. Nevertheless, the Aboyade Committee provided the intellectual and technical framework for Nigeria's modern revenue allocation system. While its specific formula was not adopted, its core principles—a dominant federal government and a need-based, multi-factor approach to horizontal sharing—have defined Nigerian fiscal federalism ever since. 

By 1980, Nigeria had returned to civilian rule under the 1979 Constitution, which created a presidential system with 19 states and a clear recognition of local government as a distinct third tier of government. The new constitution required a permanent, equitable revenue allocation formula. The Okigbo Commission was tasked with reviewing all previous reports (including the rejected Aboyade framework) and recommending a system. The Okigbo Commission of 1980 simplified recommendations of the Aboyade Commission and entrenched a hybrid system. Its horizontal formula gave heavy weight to minimum responsibilities and population, some weight to social development, and a small weight to internal revenue effort. It also created special funds for the Federal Capital Territory, mineral-producing areas, ecological problems and revenue equalisation. Specifically, it adjusted the weights for the sharing formula: FG (55%), States (30%) and Local governments (15%). In addition, the commission recommended a minimum of 2% to 5% of revenue (specifically from mining rents and royalties) be allocated to the mineral-producing states based on derivation. By this point, the federation had become mainly remedial in orientation, but it still retained pockets of the reward principle.

 The late military era and the transition to the present order completed the move from ad hoc commissions to a permanent constitutional framework via the Danjuma Commission of 1988 whose work was codified with the establishment of a permanent revenue institution (RMAFC) which was embedded in the 1999 Constitution. The current constitutional settlement under Section 162 is the clearest statement of Nigeria’s present compromise. It is still mostly remedy-based—the constitution lists population, equality of states, internal revenue generation, land mass, terrain and population density as allocation principles—but it also preserves a strong reward element by requiring that derivation be reflected at not less than 13 percent of revenues accruing directly from natural resources. In that sense, Nigeria’s current revenue-sharing arrangement is not purely redistributive and not purely derivation-based. It is an uneasy compromise between rewarding contribution and remedying imbalance.

Overall, Nigeria’s revenue-sharing history shows a steady shift from a system built largely on reward—where revenue followed origin, effort, and regional contribution—to one increasingly shaped by remedy, where revenue allocation is used to hold the federation together, reduce imbalance, and finance minimum development across unequal units. Early commissions favoured derivation and regional fiscal autonomy, but the Raisman settlement marked a turning point by creating a common pool and reducing the dominance of origin-based sharing. From Binns through Dina, Aboyade, and Okigbo, the system moved further toward pooled revenues, need-based criteria, and stronger federal control, even while retaining limited reward elements such as internal revenue effort and derivation. The present constitutional framework reflects this long evolution: it is neither purely derivation-based nor fully equalising, but a hybrid arrangement that tries to balance political cohesion with fiscal fairness. Understanding this history is important because Nigeria’s current fiscal tensions are not accidental; they are the result of a long institutional attempt to reconcile reward and remedy in a deeply unequal federation. 

Federation Revenue in Numbers: A System Built for Another Era

A look at empirical data provides some evidence of the seismic changes in the composition of federation revenues and the need for a redesign of the status quo. CBN data between 1981 and 2023 (See Figure 1) reveals a varying prominence of oil revenues.  Oil’s share of aggregate federation account revenues accounted for about 65% in 1981, rose to over 80% by 2000, and was still close to 74% in 2010. By 2023, however, oil’s share had fallen to about 29%, while non-oil revenue had risen to about 71%. The same shift is visible against the size of the economy: oil revenue was equal to over 22% of GDP in 2000, but only about 2.4% in 2023. In plain terms, the federation is no longer being carried by oil in the way the old fiscal bargain assumed.

That matters because the old system was designed mainly to share rents, not to force revenue responsibility. As oil has lost fiscal weight, the pressure on the common pool has increased. The Federal Government still carries heavy national obligations, but the states and local governments remain highly dependent on shared revenues. The data show that this dependence is still deep. Excluding VAT, subnational internally generated revenue accounted for only about 15% of subnational revenues in 2023. Even when VAT (which is centrally-collected) is included, the ratio was only about 50%. In other words, most states still do not finance a large enough share of their spending from taxes they directly control and visibly raise. That is why the tax–service link remains weak.

The numbers also explain why budgets so often fail in ways citizens can see. When revenues come under pressure, capital spending is usually the first casualty. Federation-wide capital spending fell to just under 20% of total spending in 2016, one of the clearest signs of how quickly investment is squeezed when the revenue base weakens. Even in 2023, capital spending was only about 30% of total federation spending. This is not just a federal problem. Subnational governments still account for a large share of development spending, yet they do so from a fragile financing base. In recent years, states and local governments together have accounted for about half of total capital spending in the federation. So, when the financing system is weak or volatile, the consequence is immediate: delayed projects, underfunded infrastructure, unpaid contractors, and uneven delivery of basic services.

Figure 1: Nigeria Federation Revenues (Oil vs Non-Oil Shares)

Source: CBN

Figure 2: Nigeria Aggregate Spending (Federal State & Local Government)

Source: CBN 

Figure 3: Nigeria Aggregate Capital Spending (Federal State & Local Government)

Source: CBN

Figure 4: Nigeria Subnational Revenues (IGR + VAT) 

Source: States’ BIRs, Agora Policy

Taken together, the data show that the present arrangement is under strain for structural reasons, not just political ones. Oil no longer plays the dominant fiscal role it once did, but the federation still behaves as if a large and expandable common pool will continue to carry growing spending expectations. That gap is at the heart of the current problem. The centre is squeezed, the states remain dependent, and public investment becomes unstable whenever revenues disappoint. This is why Nigeria’s fiscal federal debate can no longer be treated simply as a quarrel over shares. It is now a question of whether a system designed for a high-oil distributive era can still support growth, stability, and service delivery in a very different fiscal environment.

Review of Cross-Country Approaches to Fiscal Federalism

The next section situates Nigeria’s experience within the context of fiscal federalism across various country examples.

Fiscal federalism is ultimately about one thing: aligning political authority with fiscal responsibility. However, as we shall see the cross-country experience suggests that there is no single model of fiscal federalism.  What matters is not whether a country is more centralised or more decentralised, but whether the system is coherent and politically acceptable. In every federation, the same problem appears in different forms—central governments typically have the strongest tax instruments and macro-stabilisation mandate, while sub-national governments carry the most politically visible spending obligations (schools, health, policing, local infrastructure). The quality of a federation is largely determined by how it manages three tensions: vertical imbalance (who raises vs who spends), horizontal imbalance (rich vs poor regions), and stabilisation (how the system absorbs shocks). Some countries, such as the United States and Switzerland, rely heavily on subnational taxation and therefore preserve a strong local tax– public service link. Others, such as Canada and Germany, combine meaningful subnational authority with explicit equalisation systems designed to reduce regional fiscal disparities. A third group—including Australia, South Africa and, in a different constitutional form, Spain—shows that a country can centralise revenue quite heavily and still make decentralisation work, provided transfers are transparent, equalisation is rules-based, and fiscal oversight is credible. Nigeria’s debate often treats “revenue sharing” as the whole question. In mature federations, revenue sharing is only one tool—often subordinate to clear tax assignment, credible equalisation, and strong budget institutions. The emerging-market cases are especially useful for Nigeria because they show the costs of getting the balance wrong: when spending is devolved faster than revenue powers, politics shifts toward bargaining over transfers rather than building local tax bases and productive capacity

Table 1: Cross-country comparison of fiscal federalism design features

Selected advanced and emerging-market systems, with Nigeria as reference case

Country	Model	Revenue autonomy (subnational)	Transfers / equalisation	Discipline & oversight	Key takeaway for Nigeria
United States of America	Tax-assignment federation; large conditional grants	High (states: sales & income; local: property)	Implicit (federal taxes; programme grants)	State balanced-budget rules; market discipline	Own-source taxes anchor subnational accountability; grants are conditional and tied to programmes
Canada	Strong provinces; clear division of roles	High (PIT, sales taxes in many provinces)	Explicit federal equalisation programme	Strong reporting; market discipline	Autonomy works when equalisation is rules-based and trusted
Germany	Cooperative federation; shared ('joint') taxes	Medium (rates largely harmonised)	Strong explicit equalisation + supplementary grants	High coordination; legal constraints	Strong equalisation requires deep coordination and data-rich administration
Switzerland	Highly decentralised; tax competition	High (cantons/communes levy income/wealth taxes)	Explicit equalisation preserving autonomy	High transparency; limited bailouts	Tax-service link is visible; poor performance is harder to hide
Spain	Decentralised regional state; asymmetric regimes	Medium overall; very high in foral regions	Explicit equalisation in common regime	Strong national fiscal rules; close monitoring	Central coordination can coexist with decentralisation if rules and data are credible
Australia	High VFI federation; central revenue dominance	Low-medium (states have limited major taxes)	Technocratic HFE; GST distribution	Strong formula governance; oversight	Central revenue can work if equalisation is rigorous, transparent, and trusted
India	Large federation; tax harmonization (GST)	Medium (reduced indirect tax autonomy post-GST)	Finance Commission: tax devolution + grants	GST Council; borrowing controls vary	Harmonisation needs credible devolution and dispute-resolution
Indonesia	Unitary but fiscally decentralised post-2001	Low-medium (limited local tax base)	General allocation + revenue sharing + special transfers	Oversight uneven; capacity constraints	Transfers must be paired with local PFM capacity and enforcement
South Africa	Quasi-federal; strong centre	Low (provinces limited tax handles)	Equitable share + conditional grants	Audit/treasury controls; conditionality	If sub-nationals cannot tax, accountability must come from strict PFM and audits
Mexico	Federal with centralised revenue; transfer-dependent states	Low (limited state tax base)	Revenue-sharing + earmarked transfers	Soft constraints; bailout risk	High transfer dependence + weak no-bailout discipline fuels bargaining not development
Brazil	Highly decentralised; complex earmarking	High (states/municipalities significant taxes)	Large transfers, some earmarked	Fiscal rules exist; debt pressures recur	Revenue autonomy must be matched by enforceable debt and fiscal responsibility rules
Nigeria	Federation with centralised collection; shared pool	Low (limited tax-at-the-margin; high FAAC dependence)	Formula sharing; limited capacity equalisation; high volatility pass-through	Borrowing controls; transparency gaps; bailouts periodic	Reconnect spending to taxing; build explicit equalisation and automatic stabilisers

 

Notes: “Revenue autonomy” is a qualitative assessment of subnational control over major tax bases and rates. “Equalisation” refers to explicit capacity/need equalisation mechanisms (not general redistribution through national programmes). Spain operates two financing regimes: the common regime for most autonomous communities and the foral regime (Basque Country and Navarre) with much higher tax autonomy. VFI = vertical fiscal imbalance; HFE = horizontal fiscal equalisation.

What does this mean for Nigeria’s debate? Across the cases highlighted in the table, a few patterns are consistent. Firstly, strong federations do not rely on FAAC-style revenue sharing as an organising principle, rather they rely on clear tax assignment and predictable transfers, preserving a visible link between local taxes and the provision of local public goods and services. Secondly, where revenue is centralised (Australia), the system works only if equalisation is transparent, rules-based and trusted, and spending responsibilities are clearly assigned — otherwise transfers become permanent political conflict. Lastly, where revenue is decentralised (Switzerland, Canada, Brazil), it works only if subnational governments face hard budget constraints and fiscal rules, or the centre ends up absorbing recurring bailout risk. The emerging-market cases, Mexico in particular, carry the sharpest warning for Nigeria: transfer dependence plus soft budget constraints produces chronic bargaining, weak local accountability, and macro fragility rather than development.

Nigeria's central problem is therefore not simply "how much derivation." Every successful federation eventually resolves a core design choice: either decentralise meaningful taxation so states own their fiscal decisions or centralise revenue but build a credible equalisation-and-stabilisation system that ensures the delivery of public goods and services and imposes discipline on sub-nationals. Nigeria currently does neither — combining high transfer dependence, weak stabilisation, limited tax autonomy, and only partial equalisation. The debate remains permanently live not because the shares are wrong, but because the federation has yet to choose a coherent model at all. 

Why Does this Matter for Economic Growth and Development? 

Fiscal federalism is often discussed in Nigeria as a question of sharing—who gets and controls what. But a review of empirical literature makes the obvious connection that the nature of fiscal systems also shapes outcomes for growth, investment, and development. It affects whether governments have incentives to raise revenue, whether public spending is stable or volatile, whether budgets are disciplined or soft, and whether poorer states are supported in a meaningful way or simply kept dependent. In that sense, fiscal federalism is not just a constitutional arrangement. It is key pillar of the economic growth model for federal systems.

The clearest finding in the literature is simple. Accountability is stronger when the government that spends is also forced to raise a meaningful share of the revenue it uses. Where that link is weak, the incentives are poor. Eyraud and Lusinyan (2011, 2013) show that when subnational spending responsibilities grow faster than subnational revenue powers, fiscal discipline weakens. Transfers and borrowing soften budget constraints, reduce tax effort, and can worsen fiscal balances. Dülgeroğlu and Martinez-Vazquez (2025) reach a similar conclusion in the Turkish case: heavy dependence on transfers reduces local tax effort, especially once vertical fiscal imbalance becomes large. The lesson for Nigeria is direct. When states spend largely from Federation revenues, the pressure to build a strong local tax base weakens, and the politics of revenue mobilisation becomes easier to avoid.

The growth literature sharpens the point further. Gemmell, Kneller and Sanz (2013) show that not all decentralisation has the same effect. Spending decentralisation on its own can weaken growth, while revenue decentralisation is more likely to support it. In plain terms, devolving responsibilities without devolving real revenue authority is a weak foundation for long-run development. For Nigeria, this matters because states are expected to deliver more services and respond to more demands, but most still do not control enough strong tax handles at the margin. The result is that competition across states is too often about securing a larger share of the common pool, rather than building productive local economies and a stronger local tax base.

The literature also shows that transfers do not automatically produce fairness. Equalisation has to be designed deliberately. Goerl and Seiferling (2014) find that heavy transfer dependence is associated with higher inequality, especially where decentralisation does not come with strong own-revenue capacity. Ahmad and Singh (2003) make the Nigeria-specific point that a shared oil revenue system does not necessarily protect weaker states or stabilise service delivery; it can instead pass volatility through the federation and produce uneven outcomes. The broader lesson from Ahmad and Searle (2005), the OECD (2014), and Cottarelli (2009) is that good design requires three things at once: transfers that are transparent and stabilising, equalisation that is aimed at fiscal capacity rather than political bargaining, and substantial own revenue authority at the subnational level to preserve accountability. 

For Nigeria, the message is not that the country must simply decentralise more or centralise more but rather that revenue decentralisation must go hand-in-hand with decentralising responsibilities for the delivery of public goods. If that misalignment continues, the likely outcomes are already familiar: weaker tax effort, weaker fiscal discipline, unstable public investment, uneven service delivery, and persistent regional inequality. 

Reform Ideas—Getting to Canada

Nigeria’s present fiscal federal arrangement was largely shaped in a period when oil revenues could sustain a broad distributive bargain across the federation. That design was politically useful at the time, but it is increasingly dated in a context of weaker oil production growth, greater revenue uncertainty, rising security costs, demographic pressure, and large infrastructure needs. That means moving away from a fiscal federalist model built for a high-oil era, which masks weak tax effort and blurs responsibility to a tax, towards a system where governments at all three tiers bear clearer responsibility for raising the money they spend. 

In rethinking the status quo, two federations from the comparative review stand out as the most instructive poles. Australia represents the case for centralised revenue with rigorous equalisation: the GST is distributed according to horizontal fiscal equalisation, and a permanent technocratic body — the Commonwealth Grants Commission — independently measures the relative fiscal capacities of states and recommends distribution. Canada, while having administrative central collection, represents the case for meaningful subnational tax autonomy paired with an explicit, rules-based equalisation programme. Both models work because the underlying institutional bargain is credible and broadly accepted.

Adopting the Australian model fully would require broad acceptance that a central technocratic process can legitimately measure need and capacity — difficult to sustain in a federation where the common pool is deeply distrusted and as we saw in the earlier commissions lacks crucial data (for example on population) and technocratic capacity. Adopting the Canadian model would require genuine devolution of revenue authority to states that currently lack the tax base and administrative capacity to use it.

The historical and comparative record points toward a clear destination. Nigeria cannot sustain a federation where states want more spending power but resist meaningful taxing responsibility, and where the centre collects everything but equalises nothing rigorously. The long-run goal — call it the getting to Canada problem — is a system where states have real, own-source revenues, where equalisation is technocratic and capacity-based rather than politically negotiated, and where the tax–service link is visible enough to discipline both politicians and citizens. Getting there requires mutually-reinforcing reforms, six of which are outlined here: 

• The first priority is to restore the integrity of the Federation Account. Despite being a constitutional creation, Nigeria’s Federation Account could use more transparency in the management of inflows and outflows. There is regular tension among the FG and the states on the management of the account. Though FAAC is designed as an inclusive and consensual platform, it is also defined by information asymmetry and distrust. To restore credibility to the operation and management of the Federation Account, all tiers of government need to have clear and real-time visibility on the inflows and outflows, the gross revenues, all statutory deductions and retentions, and the final net amounts distributed. This is not just about the component statements or the FAAC communiques or policies/practices that vary from one administration to the other. Enhanced transparency of the Federation Account should be backed by legislation.Reform will remain politically difficult for as long as the common pool is opaque. Closely related to this is the need to replace the present cost-of-collection model. Central collection of major taxes and resource revenues may still be justified on grounds of efficiency and macroeconomic coordination, but automatic percentage-based deductions by revenue agencies are no longer consistent with the transparency and accountability Nigeria now requires. Revenue agencies should instead be funded through transparent appropriations, audited operating budgets, and performance-linked benchmarks rather than through first-line claims on gross collections. Without that discipline, every discussion about equalisation, stabilisation, and vertical sharing will always be contentious precisely because of the dark shadows cast by opacity and mistrust. 
• The second priority is to rebuild the tax–service link at the state level. Nigeria cannot remain a federation in which states demand greater spending authority while relying overwhelmingly on centrally-pooled revenue. But the answer is not unrestricted state freedom to set rates across all major taxes. In present conditions, that could encourage a race to the bottom, widen interstate disparities, and create administrative complexity without materially improving accountability. A more realistic first step is a minimum-rate framework. Under this approach, the centre would retain the common base and set a national floor, while states would be allowed limited upward flexibility within a narrow band on selected taxes, especially personal income tax and property-related charges. The immediate focus should therefore be on stronger CIT, PAYE & VAT compliance, modern property and land registers and better valuation systems. The objective is not tax fragmentation, but a clearer tax–service link. Where states choose to spend more, they should be able—and be required—to justify raising more. To prevent under-taxation from becoming another route to larger transfers, equalisation should be assessed on the basis of standard tax effort, not whatever low rate a state chooses to adopt.
• The third priority is to move from politically negotiated sharing toward more explicit fiscal-capacity equalisation. Nigeria has long operated formulas with remedial intentions, but not a modern equalisation system that consistently measures what each state can raise at a reasonable level of tax effort and what it needs to provide a basic minimum of services. That gap should be narrowed by strengthening and repurposing the existing allocation machinery, especially RMAFC, so that it gradually develops and publishes a clearer methodology for fiscal capacity and basic expenditure need. A state should not receive support simply because it is weak or politically noisy; it should receive support because, after reasonable tax effort, it still cannot provide a basic floor of public services. That is what makes equalisation legitimate. 
• The fourth priority is to clarify expenditure assignments and end the current culture of shared blame. A federation cannot work if nobody can clearly say who is responsible for the basics. In Nigeria, education, health, and local infrastructure often sit in zones of overlapping responsibility. If the Federal Government wants national minimum standards, it should support them through clear and narrowly designed grants tied to measurable outputs, not through broad counterpart-funding schemes that often strand resources, as the experience with UBEC has shown. Conditionality should be simple, transparent, and linked to a few verifiable service outcomes rather than to complex matching requirements that weaker states cannot meet. Citizens should be able to tell who is responsible for payroll, who funds capital projects, and who is responsible for maintenance.
• The fifth priority is to make hard budget constraints more credible. Formal borrowing rules are not enough when arrears, guarantees, and contingent liabilities remain outside the main fiscal picture. States and major agencies should publish regular consolidated accounts that include formal debt, arrears, guarantees, and quasi-fiscal obligations. Access to discretionary federal support, guarantees, and extraordinary interventions should be conditional on compliance with reporting and transparency rules. Debt service-to-revenue thresholds must carry automatic consequences — including temporary withholding of discretionary transfers — for non-compliance. Federal bailouts should require explicit legislative supermajority approval, so that the implicit expectation of rescue is removed from subnational fiscal calculations. Bailouts should not be assumed. If exceptional support is ever required, it should be explicit, conditional, and legislatively visible.
• Lastly, the oil question must be handled separately and realistically within Nigeria’s existing constitutional and legal reality. Nigeria is probably not ready for a pure “eat-what-you-kill” approach to hydrocarbon revenues. Oil remains too concentrated and too important for macroeconomic stability. Ownership and control of mineral resources remain vested in the Federal Government, and revenues collected by the federation are payable into the Federation Account. The more workable path is to retain central collection of hydrocarbon revenues, preserve derivation as the reward element but with higher retention for states at the origin, and then embed the rest within a more transparent stabilisation-and-equalisation framework. In other words, oil should continue to support national cohesion and macro stability, but the rules governing what is retained, what is shared, and what is saved must become clearer, more credible, and less discretionary. 

Beyond the immediate, solving the ‘getting-to-Canada’ problem is central to re-wiring the Nigerian economy for competitiveness. Nigeria should commit to an end‑state in which FAAC‑style revenue sharing is no longer the organising principle of the federation. The sustainable alternative is a tax‑assignment and equalisation model—closer to Canada—under which states raise a larger share of their revenue from taxes clearly assigned to them, while the federal tier provides explicit equalisation transfers to ensure broadly comparable basic services across unequal fiscal capacities. This will take the form of constitutional amendments that seek to strengthen state taxing powers over consumption and activity taxes; safeguard free interstate commerce; provide for central revenue administration by agreement; and legitimise equalisation payments based on measured fiscal capacity. The practical point is that abolishing FAAC distributions does not mean abolishing transfers; it means replacing ad hoc and contested sharing with predictable rules, transparent remittances, and a published equalisation methodology. The transition must also be managed: the federation should provide a time‑bound stabilisation and adjustment grant so that weaker states are not forced into fiscal collapse while tax capacity and administration are being strengthened. A Canada‑style system is attractive because it replaces Nigeria’s current incentives (bargaining over a pool) with a clearer bargain: states raise meaningful own revenue; the federation equalises capacity; and politics shifts toward performance rather than monthly distribution fights.

Without a doubt, some of the deeper reforms outlined here would require amendments to the constitution, as well as changes to the laws governing the Federation Account, FAAC, and RMAFC. That makes political consensus just as important as technical design. Reform must therefore be phased. The immediate agenda is transparency, stabilisation, clearer assignments, and more realistic state tax responsibility within the existing system. The medium-term agenda is a stronger equalisation framework and a deeper rebuilding of the tax–service link. The long-run objective should be a federation in which states have more meaningful own-source revenue and equalisation is explicit, rules-based, and credible.

Nigeria is currently running a fiscal system designed for a high-oil distributive era in a lower-oil, higher-pressure development era. The task of reform is to close that gap. Nigeria does not face a choice between centralisation and decentralisation. It faces a choice between misaligned federalism and coherent federalism. Without reform, the federation will continue to oscillate between restructuring demands and executive recentralisation, with growth constrained and volatility amplified. With reform, Nigeria can retain its federal essence while strengthening fiscal stability, development outcomes, and national cohesion.

 

References

1. Ahmad, E. and Searle, B. (2005) On the Implementation of Transfers to Subnational Governments. IMF Working Paper WP/05/130. Washington, DC: International Monetary Fund. 
2. Ahmad, E. and Singh, R. (2003) Political Economy of Oil-Revenue Sharing in a Developing Country: Illustrations from Nigeria. IMF Working Paper WP/03/16. Washington, DC: International Monetary Fund. 
3. Baunsgaard, T. (2003) Fiscal Policy in Nigeria: Any Role for Rules?IMF Working Paper WP/03/155. Washington, DC: International Monetary Fund. 
4. Bastagli, F., Coady, D. and Gupta, S. (2012) Income Inequality and Fiscal Policy(2nd ed.). IMF Staff Discussion Note SDN/12/08. Washington, DC: International Monetary Fund. 
5. Brosio, G. (2000) Decentralization in Africa. Paper prepared for/presented at the IMF/World Bank Fiscal Decentralization Conference (paper dated October 2000). 
6. Dülgeroğlu, E.C. and Martinez-Vazquez, J. (2025) The Effect of Vertical Fiscal Imbalances on Local Tax Effort in Türkiye. International Center for Public Policy Working Paper 25-15. Atlanta, GA: Georgia State University (Andrew Young School of Policy Studies). 
7. Eyraud, L. and Lusinyan, L. (2011) Decentralizing Spending More than Revenue: Does It Hurt Fiscal Performance?IMF Working Paper WP/11/226. Washington, DC: International Monetary Fund. 
8. Eyraud, L. and Lusinyan, L. (2013) ‘Vertical fiscal imbalances and fiscal performance in advanced economies’, Journal of Monetary Economics, 60(5), pp. 571–587. 
9. Gemmell, N., Kneller, R. and Sanz, I. (2013) ‘Fiscal decentralization and economic growth: spending versus revenue decentralization’, Economic Inquiry, 51(4), pp. 1915–1931. 
10. Goerl, C.-A. and Seiferling, M. (2014) Income Inequality, Fiscal Decentralization and Transfer Dependency. IMF Working Paper WP/14/64. Washington, DC: International Monetary Fund. 
11. Hobdari, N., Nguyen, V., Dell’Erba, S. and Ruggiero, E. (2018) Lessons for Effective Fiscal Decentralization in Sub-Saharan Africa. IMF Departmental Paper (African Department). Washington, DC: International Monetary Fund. 
12. International Monetary Fund (2009) Macro Policy Lessons for a Sound Design of Fiscal Decentralization. IMF Policy Paper (Fiscal Affairs Department), July. Washington, DC: International Monetary Fund. 
13. Oates, W.E. (1972) Fiscal Federalism. New York: Harcourt Brace Jovanovich. 
14. OECD (2014) Fiscal Federalism 2014: Making Decentralisation Work. Paris: OECD Publishing. 
15. Reingewertz, Y. (2014) Fiscal Decentralization – A Survey of the Empirical Literature. SSRN Working Paper (posted November 2014). 
16. Ter‑Minassian, T. (ed.) (1997) Fiscal Federalism in Theory and Practice. Washington, DC: International Monetary Fund