States now have the money—Will they finally fix Nigeria?

Nigeria’s latest overhaul of its Value Added Tax (VAT) regime, signed into law by President Bola Tinubu on June 26, may not have sparked immediate headlines outside policy circles, but its implications could be far-reaching. At stake is not only how tax is administered and shared but also whether the country’s long-fragmented fiscal federalism can be steered towards equity, efficiency, and development.

For decades, the country’s over-centralised tax structure has exacerbated dependence on the federal centre, dulling incentives for state-level innovation and accountability. With this reform, that script may begin to shift. The question is whether Nigeria’s governors, long accustomed to monthly allocations from Abuja, are ready for the discipline and ambition required to turn revenue into results.

“If implemented faithfully, this VAT reform could mark the beginning of a more balanced, responsive, and development-focused fiscal framework.”

On the surface, the reform is sound technocratic policy. It expands zero-rated goods to cover basic necessities such as food, medicines, school books, and electricity transmission, moves that should soften the blow of indirect taxation on poor households. It introduces full input VAT recovery for businesses, a long-overdue change that aligns Nigeria with international norms and promises cost savings for producers and consumers alike.

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It also mandates e-invoicing and fiscal digitalisation, aiming to reduce fraud and leakages in VAT collection, a persistent weakness in Nigeria’s tax administration. Here, lessons from Kenya, Rwanda, and Latin America provide some hope: when implemented effectively, digital tools can boost compliance without increasing rates.

However, the reform’s most politically significant dimension lies in the revised VAT allocation formula. The federal government’s share shrinks from 15 to 10 percent, while the states take 55 percent and local governments 35 percent. Crucially, revenue will now be distributed not merely by where companies are headquartered but based on where consumption occurs. Lagos, Rivers, and other economic hubs are obvious beneficiaries. But every state stands to gain if it can stimulate internal demand and formalise its economy.

In principle, this marks a step toward the fiscal federalism long advocated by economists and political reformers alike. But more money does not automatically mean better outcomes. The history of Nigeria’s subnational governments is replete with examples of profligacy, opacity, and underperformance.

Unless matched with rigorous transparency and a renewed public service ethos, the VAT reform risks becoming another missed opportunity. Already, several state budgets remain opaque, and capital expenditure routinely lags behind recurrent spending. The promise of “bringing government closer to the people” has too often translated into bloated bureaucracies and under-delivered services.

The onus is now squarely on state governors to demonstrate that decentralised resources can produce decentralised results. That means investing in roads, schools, primary healthcare and energy access, not in motorcades or media stunts. It means publishing monthly VAT inflows and expenditure breakdowns in plain language. It means treating taxation not as an extraction but as a contract with the governed.

The reforms, though laudable, are only as effective as the systems built to support them. Will the Federal Inland Revenue Service (FIRS) be able to roll out e-invoicing uniformly across formal and informal sectors? Will states develop the capacity to analyse consumption trends and optimise local revenue generation accordingly? And will citizens, especially the growing youth demographic, demand accountability for these new fiscal tools?

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Nigeria’s economic future depends not just on what Abuja relinquishes but on what state governments choose to do with what they gain. There is no doubt that the reform lays a more rational and equitable foundation for domestic revenue mobilisation. But it cannot, on its own, bridge the infrastructure deficit, reverse declining public trust, or insulate the economy from oil shocks and inflationary pressures.

That requires something rarer: political courage, administrative competence, and long-term thinking, qualities often in short supply within Nigeria’s political elite.

If implemented faithfully, this VAT reform could mark the beginning of a more balanced, responsive, and development-focused fiscal framework. But its real significance may lie in the broader question it poses: can Nigeria’s governors rise to the occasion, not only as custodians of state revenue but as genuine stewards of social progress?

If they fail, the country risks reinforcing the public’s long-standing cynicism about taxation and governance alike. But if they succeed, even incrementally, this quiet policy shift could prove more transformative than many of the headline-grabbing reforms of the past decade.

The test has begun. It will not be measured by the amount collected but by the lives improved.