Work

Fiscal federalism and economic equity: evaluating effects of VAT revenue sharing formula on state-level development in Nigeria

Year: 2026

Type: article

Abstract: Introduction This study examines the implications of Nigeria's 2025 Value Added Tax (VAT) revenue-sharing reform under the Tinubu administration for fiscal federalism, economic equity, and subnational development. The revised formula increases the weight of the derivation principle, directing a greater share of VAT proceeds to states with stronger consumption bases and revenue-generating capacity. Methods The study employed a qualitative research design. Data were collected through semi-structured interviews with 20 stakeholders from federal institutions, state governments, academia, the private sector, and civil society across Nigeria's six geopolitical zones. Relevant policy documents were also analyzed. Results and discussion Three main patterns emerged. First, approximately four-fifths of respondents viewed the new formula as favouring economically advanced states particularly Lagos, Rivers, and the Federal Capital Territory while limiting the fiscal space of less-developed states. Second, respondents associated the reform with improved tax compliance and revenue effort in high-consumption states, but questioned whether states with weaker structural capacity could respond to these incentives. Third, participants warned that the reform could deepen existing regional development disparities without robust equalisation transfers and targeted capacity-building. Overall, the findings suggest that the reform may improve efficiency and accountability in revenue generation, but also poses risks to fiscal equity and national cohesion unless supported by effective redistributive safeguards. The study contributes evidence-based perspectives to the literature on fiscal decentralization and Nigeria's evolving VAT system, particularly on the challenge of balancing efficiency, equity, and subnational development within a federal framework.

Source: Frontiers in Political Science

DOI: 10.3389/fpos.2026.1954730

Authors: Ezinwanne Ekekwe, Kingsley Ekene Okoye

Institution: University of Nigeria

Language: English

Topic: Local Government Finance and Decentralization

Subfield: Political Science and International Relations

Field: Social Sciences

Domain: Social Sciences

SDGs: Reduced inequalities, Peace, justice, and strong institutions

Open Access status: gold

Estimated APC paid: $1,418