Home Analysis Why states should own and develop resources and pay tax to Federal Government

Why states should own and develop resources and pay tax to Federal Government

by Business News Report

By Omoh Gabriel
Last week the Lagos State Governor sparked off a debate on the minimum wage. The debate is that states cannot pay the new N18,000. The minimum wage had been pegged at N7,500. This is about 140 per cent increase. Wages are not determined on political platform or on emotion but on economic basis. Ability to pay. In a true fiscal federalism, it is the responsibility of the federating units to negotiate with their workers in what is termed collective bargaining.
There are wage differentials in every economy and across sectors. But Nigeria does not operate a true fiscal federalism. It is more like a unitary state which twelve years of active democracy has not been able to correct. The Federal Government is like imposing the minimum wage issue on the states which is an aberration of fiscal federalism. The news is that because the Federal Government has reached agreement with federal civil servants and states are expected to follow suit, Governors are pushing for a new revenue formula that will cede more funds to states and the local governments to enable them pay workers and not to embark on development.
Lagos State Governor, Babatunde Fashola revealed the new proposal on May 1, as workers told states to pay the N18,000 minimum wage or face a showdown. Governors have said they would not be able to pay the new wage because the states are short of funds. Should they be forced to pay, there will be little or no funds for projects. They also accused the Federal Government of unilaterally entering into an agreement on the new wage with the workers.
The Nigeria Governors’ Forum (NGF) raised a committee of six, headed by Fashola, to review the revenue formula and submit its recommendation. The Lagos helmsman said that the committee recommended a new formula: Federal Government (35 per cent), the 36 state governments (42 per cent) and the 774 local governments (23 per cent). The current revenue formula gives the Federal Government 52 per cent, states 26.72 per cent and the local governments 20.60 per cent. Governors that are pushing for a new revenue formula had the unique opportunity during these 12 years through their forum to have caused a bill that when passed, will ensure true federalism.

Professor Adebayo Adedeji, an eminent Economist in his book, Nigerian Federal Finance, Its Development, Problems and Prospects said that ‚ÄúFederal finance, in contrast with unitary finance, is a triple division of resources between the federal authority, the regional or state governments, and the local authorities. A study of federal finance therefore involves this triple relationship.‚Äù But the most important characteristics of federal finance are to be found in the financial status of the ‘intermediate’ political entities, the states or regions, which are designed to perform certain functions which in a unitary system, are assigned to the central authority.
The principles of federal finance can therefore be interpreted to mean the principles which these intermediate political entities and the central authorities should follow in their fiscal operations. The position of local authorities in a federation is not appreciably different from their position in a unitary state, at least so far as finance is concerned. Nigeria has no defined fiscal structure in states and has not pursued taxation as main revenue source as a result of earnings from oil. Each level of government has in the last 30 years or so, depended solely on revenue from sale of crude which is monetised every month and shared in a formula that is somewhat skewed in favour of the Federal Government. States and local governments in the federation have abandoned their responsibility of generating and developing their internal resources and only depending on the federal allocation for payment of salaries. This aberration arose from the incursion of the military into the polity that allocated resources based on its concept of its command structure.
In an established federalism, the principles of public finance, particularly of taxation, have received attention from the earliest days of economic analysis. The mercantilist and the physiocrats, as well as the classical economists, advanced propositions concerning tax principles. David Ricardo and John Stuart Mill recognised the division of the subject-matter of public finance into three aspects – revenue, expenditure, and public debt.
Yes in Nigeria, there is revenue, expenditure and debt in public finance. The question is what are the sources of revenue in public finance in Nigeria? Up till now, about 90 per cent of public finance is from oil. What about other natural resources that are said to abound in the country? In every state of the federation, there are large deposits of mineral resources that when developed, can earn the country more money than oil, yet nothing is being done.
Is it normal for the control of land across the country to be vested in the Governors while the mineral deposits in the same land are in the hands of the federal authority? You need a mining lease, you go take permit from the Federal Government but when you need land to build or develop structures, you obtain certificate of occupancy from the state government. Yet, all this while, the state governors have not seen anything wrong with this arrangement. Nigeria must begin to operate a true federalism in which tax policy becomes the key fiscal instrument. States must be allowed to develop the resources in their domain and pay tax to maintain the Federal Government.
It should not be that every now and then the clamour for a new revenue formula begin to disturb the polity. Yes, it is true that in true fiscal federalism, the Federal Government cannot be content with only following the basic principle of public finance in its own sphere of activity, it should also act as a coordinator to effect such transfers as may be necessary to achieve the overall marginal equilibrium. That is aid and financial assistance to such states. As it is, the Federal Government has become the big father who collects all the money and dole out favours to states and local governments. It is an essential function of the Federal Government to follow the basic principle of public finance for the country as a whole, taking into account the fiscal activities of the states. The question to ask is which of these levels of government are closer to the people and are entrusted with services that are of immediate benefit to the masses? The Federal Government should diverge itself from services that states and local governments can offer and thus make more resources available to them in the interim.
According to Adedeji, the ‘federal principle’ requires that the federal and state governments be coordinate but independent of each other within their spheres of competence. In the field of public finance, this means independent and coordinate tax jurisdictions. And with independent financial resources and distinct functions goes independent public expenditure policy. For example, where independent sources of revenue are assigned to the federal and state governments, each might tax its own sphere according to the principle of least aggregate sacrifice.
Because of differences in the level of economic development of the different states, the marginal sacrifice of the taxpayers of each state is unlikely to be the same as the marginal sacrifice of the taxpayers of the other states. Here is why states cannot pay the same level of minimum wages. At the moment, states are not equally endowed with resources. Whatever may be the basis for dividing the spheres of government between these two levels, each should be given adequate fiscal powers if it is to be able to discharge its duties and responsibilities and still preserve its autonomy. Fiscal independence is a concomitant of local self-government, which the federating units desire to preserve. It is, however, a rarity for the fiscal powers granted to federal and state governments to prove adequate for all time.
Resources available to the various levels of government must be adequate, as far as possible, to meet the needs and responsibilities of each government. It is desirable to allocate sources of revenue to the unit government in order to achieve stability. It is more important for local revenue to be stable than for state revenue, and more important for state revenue to be stable than federal. In an emergency, the Federal Government, with its greater recourse to internal and external borrowing, is better able to bear financial shocks and strains than the state governments. Here is why every state must begin to call for control of its resources and pay tax to the Federal Government period!

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