Nigeria’s states are poised to receive a substantial increase in revenue beginning in 2026, driven by sweeping reforms to the country’s Value Added Tax distribution formula. Mr. Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, announced on Tuesday that states could collectively earn over N4 trillion annually once these changes take effect.
The disclosure came during the launch of the BudgIT State of States 2025 Report in Abuja, an annual assessment of fiscal performance across Nigeria’s 36 states that marked its 10th edition this year.
What Are the VAT Reforms?
Under the proposed tax reforms, the share of VAT revenue allocated to states will increase from the current rate to 55 per cent starting in 2026. VAT, a consumption tax levied on goods and services, currently generates significant revenue for all tiers of government. The restructured distribution formula aims to give states greater fiscal autonomy and resources to address local development priorities.
Beyond the VAT adjustment, the reform package includes transferring the complete proceeds of electronic money transfer levies to state governments and exempting state government bonds from taxation. According to Oyedele, these measures will reduce borrowing costs for states and create additional fiscal room for capital investments.
Why Does This Matter?
The timing of these reforms coincides with a period of unprecedented revenue growth for Nigerian states. Federation Account Allocation Committee transfers more than doubled from N5.4 trillion in 2023 to N11.4 trillion in 2024, reflecting the impact of various economic reforms, including exchange rate adjustments and subsidy removals.
However, Oyedele highlighted a troubling paradox: while government coffers have swelled, ordinary Nigerians have experienced declining purchasing power and reduced disposable income.
“States are receiving more money than ever before. But there is a paradox: while governments have more naira, ordinary Nigerians have less disposable income in their pockets,” he observed during his keynote address.
This disconnect raises fundamental questions about whether the anticipated N4 trillion windfall will translate into tangible improvements in citizens’ living standards or simply expand government spending without corresponding benefits.
How Dependent Are States on Federal Allocations?
Despite recent revenue increases, the BudgIT report revealed that 21 states still derive over 70 per cent of their total revenue from federal allocations. This heavy dependence on centrally distributed funds leaves these states vulnerable to fluctuations in federal revenue and limits their fiscal independence.
Oyedele described this reliance as concerning, though he acknowledged notable exceptions. Enugu State recorded a 381 per cent increase in internally generated revenue, while Bayelsa achieved a 174 per cent rise. These examples demonstrate that states possess the capacity to expand their revenue bases through improved tax administration and economic diversification.
The fiscal policy expert emphasized that the upcoming reforms present “a unique opportunity for states to build resilience, close existing tax gaps and invest in infrastructure.”
Where Is the Money Going?
One of the report’s most striking findings concerns the gap between spending and actual service delivery. For the first time in many years, aggregate capital expenditure across states exceeded recurrent expenditure, suggesting a shift toward investment in infrastructure rather than routine administrative costs.
However, budget implementation rates tell a different story. States executed only two-thirds of their education budgets, translating to less than N7,000 spent per citizen. Healthcare implementation proved even worse, with states spending merely N3,500 per citizen on health services.
“Implementation in critical areas remained poor,” Oyedele noted, underscoring that increased revenue alone cannot guarantee better outcomes without corresponding improvements in governance and execution capacity.
What About State Debts?
The report documented some progress on debt management. States collectively reduced domestic debt obligations by N2 trillion and decreased foreign loans by $200 million, with 31 states lowering their domestic debt stock during the review period.
Nevertheless, states owe over N1.2 trillion in accumulated arrears to pensioners, contractors, and workers. These unpaid obligations represent deferred liabilities that constrain fiscal flexibility and undermine confidence in government commitments.
Oyedele distinguished between productive and unproductive debt: “Borrowing is not the problem; unproductive application of debt is.” His comment suggests that states should evaluate borrowing decisions based on whether debt finances revenue-generating projects or merely covers recurrent expenses.
Which States Are Performing Best?
The 2025 BudgIT rankings placed Anambra State at the top of the fiscal performance table, followed by Lagos, Kwara, Abia, and Edo. These states demonstrated stronger revenue generation, better budget implementation, and more efficient resource allocation compared to their peers.
Cross River State’s dramatic fall from fifth position in 2024 to 29th in 2025 raised particular concerns about governance decisions and fiscal management in that state.
What Are the Key Questions Going Forward?
As states prepare to receive substantially increased revenues from 2026, several critical questions emerge:
Will states invest or merely spend? Oyedele framed this as the central challenge. The difference between investment, which creates long-term value and economic returns, and consumption, which provides no lasting benefit, will determine whether the VAT reforms succeed in improving citizens’ welfare.
Can implementation capacity improve? Additional revenue means little if states cannot effectively execute budgets in education, healthcare, and infrastructure. Strengthening procurement systems, project management capabilities, and monitoring frameworks will prove essential.
Will citizens feel the impact? The current disconnect between government revenue growth and household economic security must be addressed. Reforms succeed only when ordinary Nigerians experience tangible improvements in their daily lives.
Can states reduce federal dependence? The 21 states heavily reliant on federal allocations face structural vulnerabilities. Using the revenue windfall to expand internally generated revenue through improved tax administration and economic diversification would enhance long-term fiscal sustainability.
The Bottom Line
Nigeria’s VAT reforms represent a significant shift in fiscal federalism, channeling more resources to states at a time when federal transfers have already reached historic highs. The projected N4 trillion annual increase from 2026 creates unprecedented opportunity for states to address infrastructure deficits, improve service delivery, and enhance citizens’ quality of life.
However, opportunity alone guarantees nothing. Whether these reforms translate into shared prosperity depends entirely on how state governments choose to deploy their enlarged resources. Without corresponding improvements in governance, transparency, and implementation capacity, increased revenue risks becoming merely larger sums circulating through government accounts while citizens continue struggling with reduced purchasing power.
Oyedele’s challenge to state leaders was unambiguous: “This is a unique opportunity for states to build resilience, close existing tax gaps and invest in infrastructure.” The question now is whether states will seize this opportunity or squander it through business as usual.
