Revenue Allocation Formula in Nigeria: Definition, Formula, History and Types

INTRO:  

The sharing of revenue among the three tiers of government in Nigeria has been a contested issue due to the political nature of the exercise. Several attempts made by various administrations to create an acceptable and all-embracing revenue allocation formula for the country are yet to achieve the target result.  We discussed the basics of revenue allocation in Nigeria under the subheadings below.

Revenue Allocation Formula in Nigeria: Definition, Formula, History and Types 

Meaning:

Generally, revenue allocation means  how centrally collected money is shared among different levels of government and within each level for economic purposes. According to Olowononi (2000) quoted in Dang (2013), revenue allocation is the allocation of tax powers and the revenue sharing arrangements not only among the three levels of government but among the state governments as well. In Nigeria, there are two types: vertical allocation, which involves distributing funds among the Federal, State, and Local Governments, and horizontal allocation, which involves distributing funds among states or local governments.

Revenue Allocation Formula in Nigeria:

The revenue allocation formula as listed by Nigeria Extractive Industries Transparency Initiative (NEITI) gives 52.68% to the Federal Government, 26.72% to State Governments, and 20.60% to Local Governments. Additionally, 13% of the revenue is given to oil-producing states. The funds for State and Local Governments are further divided based on factors such as equality, population, land mass, internal revenue generation, and social development. These factors are weighted as follows: equality of states (40%), population (30%), landmass/terrain (10%), internal revenue effort (10%), and social development effort (10%).

History of Revenue Allocation in Nigeria:

Revenue allocation in Nigeria is traced to 1946 by the Revenue Mobilization, Allocation and Fiscal Commission (RMAFC), which was when regional governments gained internal autonomy under Arthur Richard's Constitution of 1946.  Since then, in the long list of the committees are: Philipson Commission (1946), Hicks-Philipson Commission (1951), Chicks Commission (1953), Raiseman Commission (1958), Binns Commission (1964), Dina Commission (1968), Abayode Technical Committee (1977), Okigbo Commission (1980). The current formula is designed by the RMAFC towards fairness, equity and justice. 

Sources of  Revenue to Nigeria:

The main sources of government revenue are oil and non-oil incomes. Oil revenue comes from crude oil sales, petroleum taxes, rents, and royalties, while non-oil revenue includes corporate taxes, customs and excise duties, value-added tax, and personal income tax.

The State with the Highest Revenue Allocation in Nigeria

Delta State received the highest allocation in 2023, with N483.57 billion. 

Importance of Revenue Allocation

Revenue allocation is crucial because increased funding for government units leads to more goods and services, higher investment, and economic growth, and more so, to achieve parity between constitutionally assigned functions and revenue sources. 

Problems of Revenue Generation in Nigeria

Challenges to revenue generation in Nigeria include low tax revenue due to narrow tax bases, low compliance, many tax exemptions, and low rates. 

Institutions on Revenue Allocation in Nigeria

The Federal Account Allocation Committee (FAAC) is responsible for distributing revenue collected by the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC). FAAC distributed N1.67 trillion to the three tiers of government in January 2024 from the revenue generated in December 2023.