Fiscal Federalism in Nigeria Essay

The question of an unexceptionable formula for tax sharing among the component tiers of the Nigerian nation is one of the roughly protracted and contr oversial debates in the political sympathiesal and macroeconomic management of the economy. This debate has its foundations in the history and evolution of the Nigerian federation. taxation allocation or the statutory distribution of receipts from the Federation Account among the disparate aims of governing has been one of the most combative and controversial issues in the nations political life.So contentious has the topic been that none of the formulae evolved at mixed times by a commission or by decree nether distinguishable regimes since 1964 has gained general acceptability among the component units of the country. Indeed, the issue, like a recurring decimal, has painfully remained the first problem that intimately every incoming regime has had to grapple with since independence. In the process, as many as thirteen different attempts have been made in devising an acceptable gross enhancement allocation formula, each of which is more remembered for the controversies it generated than issues colonisedFiscal nationalism refers to the scope and structure of the tiers of authorities responsibilities and functions as well as the allocation of resources among the tiers of political sympathies. Perhaps the most important issue of fiscal federalism is the revenue allocation formula, the sharing of national revenue among the various tiers of government ( vertical revenue sharing) as well as the distribution of revenue among the severalize governments (that is, horizontal revenue allocation).The centralization of Nigerias fiscal federalism began with the report of the Dina Commission (1968) which argued that an appropriate revenue allocation transcription should result in a more equitable distribution of revenue among the states to achieve a fit development of the federation. Revenue allocati on squeeze out be described as a method(s) of sharing the centrally generated revenue among the different tiers of government and how the amount allocated to a particular tier is sh ard among its components.Nigeria is a federal state under the federal system of government, federation or centrally-generated revenue is shared among the deuce-ace levels of government, namely the federal government, the states and the local governments. The theory of revenue sharing in a federal state is that each level of government receives an allocation of financial resources tailored to their specific compulsions as defined by the mandate of legislative competence, their substantial situation and the statutory indices of calculation.In Nigeria, decisions as to what proportion of centrally-generated revenue that would be retained by the federal government, the proportion that will be shared among the state governments and the proportion that will go to the local government has always been a pro blem, due to the fact that there is no consensus of opinion as to what could be seen as an ideal formula.The doctrines that guide the implementation of intergovernmental fiscal relations include (a) The Principle of Diversity The federal system must have the ability to accommodate a large variety of diversities. Hence, the fiscal system must provide scope for variety and differences to supply national, regional and local public goods. (b) The Principle of Equivalence base on the geographical incidence of different public goods, allocative efficiency requires the equalization of locational advantages arising from inter-jurisdictional differences with a combination of taxes and public goods and services.This requires the use of fiscal instruments for achieving macroeconomic objectives of growth, stabilization and full employment by residents of different geopolitical units this requirement controls for what is often referred to as central city exploitation thesis. (d) Minimum Prov ision of Essential Goods and work This ensures that fiscal federalism guarantees all citizens, irrespective of where they reside, the minimum provision of ertain basic public goods and services. (e) Principle of Fiscal demolishing In order to ensure a minimum level of public goods and services same microscope stage of fiscal equalization is required.This is as a result of differences in resource endowment. (f) The Efficiency Principle This principle implies that efficiency must be use in the allocation of resources (g) The Principle of Derivation The component units of a system should be able to control some of its own resources as they desire. h) The Principle of Locational Neutrality Interregional fiscal differences tend to influence location choices of individuals and firms. at that placefore, insurance policy should focus on minimizing distortions due to some interference. Hence, differential taxes which produce locational distortions should be avoided as much as practicab le. (i) The Principle of Centralized Redistribution This principle states that the redistribution function of fiscal policy through progressive taxation and expenditure programmes should be centralized at the federal level.That is, if the redistributive function is decentralized, it can result in distortions in location decisions. It should be noted that the above principles are not reciprocally consistent. There are several challenges and contending issues confronting intergovernmental fiscal relations in Nigeria 1) Non Correspondence Problem Ideally, each level of government should be given adequate resources to allow it discharge its responsibilities.Because this is not possible, there is usually a lack of correspondence betwixt the spending responsibilities and the tax powers/revenue sources assigned to different levels of government. It is this incongruence that is often referred to as the non-correspondence problem. In Nigeria, most of the major sources of revenue come under the jurisdiction of the federal government stock-s savings bank lower levels of government are supposed to generate congenital revenue. There is, therefore, the need to resolve the derangement between assigned functions and tax powers.The issues concerning fiscal relations among the constituent units of the Nigerian federation that remain by and large unresolved are the divergence between assigned functions and tax powers, principle of horizontal and vertical revenue allocation, dependence of states and local governments on federal sources of funding, tendency towards concentration and federal presence in the states (Fadahunsi, 1998). The flipper principles currently applied in the horizontal revenue allocation formula are far from acceptable to all the stakeholders. 2) Fiscal Autonomy and IndependenceThe issue of relative fiscal autonomy and independence of the state and local governments in a true federal structure goes with the corollary issue of the correspondence of govern mental functions and revenue sources. Since the creation of the twelve-state structure in 1967, states and local governments have been excessively dependent on the Federation Account. This independence must be reduced if the federating units are to be free to pursue their own development goals without world hampered by the unpredictable fluctuations in their shares of the Federation Account.It is important that revenue sources should be reallocated and made compatible with the fluctuations express for each tier of government to enhance steady and proper funding of administrative and developmental activities instead of the often experienced unexpected financial constrictions at the two lower tiers of government. 3) Oil Producing States, Oil Producing local Government Administrative Areas or Communities Professor Omo Omoruyi in his treatise the Politics of Oil who owns the petroleum, Nigeria, states or communities (2000) raised three salient questions on true ownership of embroca te in Nigeria.The question of local control over local resources is an established constitutional principle in federal systems. But the way the Nigerian federal system developed under the external colonial order (1954-60) and continued under the period of geo-ethno-military internal colonial order (1960-1999) and in the democratic dispensation between 1999 to date is yet an unresolved contending issues in the hold forth about Nigerias federalism. He challenged the Tripod approach to Nigerias problem where the three major ethnic nationalities go under the content and the trend of national issues. This tripod approach to Nigerian politics, should have been done away with by now, with the launching of the notion of federal character, which takes states in the federation as the units of representation.The tripod approach to Nigerian politics applies to how the crude, which comes from the non-majority areas, is approached in the political and economic discourse. We should in any cas e be aware of the feeling among the majority ethnic nationalities that the areas producing oil by virtue of powerlessness in the military and politics should not be allowed to lay claim to the oil from their areas as of right.However, theres a distinction between oil producing communities and oil producing states. This is the basis of the activities of the Traditional Rulers of the Producing Communities who are dealing with the President and want the money due to states on the basis of the 13% line in the Constitution should be paid to the oil producing communities/local government areas. The Traditional Rulers argument is that communities own oil and not states.This is an unresolved issue and separates the communities in riverside areas directly affected by oil spillages from their compatriots in landed areas from enjoying the full benefits of allocations to producing states. One does not know the end of this argument. How should the National Assembly address this matter? The fede ral government should find a way of making the oil producing local government administrative areas as shareholders in the voice venture arrangements with the oil companies, thus making them stakeholders in the oil industry.There was the issue of who should be spending the oil money. Should it be the Nigerian government in conjunction with the oil producing areas? Should it be the oil producing areas alone? The Constitution from 1960 till after the civil war up till 1978 gave the right of ownership to the federal government but the proceeds were shared between the federal government and the regions or states on the basis of line like the agricultural crops. 4) Federation Account and the Derivation entrepotIt is important to define what constitutes the Federation Account to which the various vertical revenue allocation formulae have been applied and what should be directly financed from it. Up to 1990, the amount accruing yearly to the Federation Account was still over 96% of tota lly federally collected revenue but since 1991, when it first dropped to about 75% and nose-dived to around 35% by 1997, it showed no sign of recovery (Olowononi, 1999).It is therefore clear, that in such a situation, whatever the vertical formula applicable, there must still be a serious fiscal imbalance between the ederal government and the two lower tiers of government. It is crucial to redress this revenue imbalance in the spirit of balanced true federalism. What appears to account for this imbalance is the assertion of the self-claimed right by the federal government to finance various first-line charges from the Federation Account before the application of the vertical formula. The first-line charges include funding for external debt service, national antecedence projects, NNPC priority projects, special reserve account, and excess proceeds of the crude oil sales account, and in addition, the joint venture cash calls account.These deductions are made from the proceeds of crud e oil sales before the derivation fund in the Federation Account is arrived at, and after which further deductions for special funds and the funding of the federal capital territory are made. It will seem more logical, with the exception of the joint venture slip of paper calls, that these various charges which are federal government obligations be financed solely from the federal governments revenue proper, that is, from its share of the Federation Account or from its revenue from other sources.Therefore, in order to determine what constitutes the derivation fund, resolving the issue of the Federation Account is crucial. Thereafter, the derivation formula to be utilized can be arrived at. 5) Oil Producing Areas and the Derivation Principle The crude oil production has been the most important economic bodily process in the Nigerian economy since the early 1970s is not subject to debate. Its impact is not moderate to its contributing almost 90% of Nigerias total foreign exchange earnings but also to the fact that the national budgets are predicated on the expected annual production and price of crude oil.