Historic Shift in FAAC Allocations: FG Slashes Share to 10%, States and LGAs to Get 90%*

14th October 2024

*Historic Shift in FAAC Allocations: FG Slashes Share to 10%, States and LGAs to Get 90%*

In a bold move, the federal government has proposed a drastic reduction in its share of Federation Account Allocation Committee (FAAC) funds, slashing its allocation to 10% while states and local governments will receive a combined 90%. This significant departure from the current sharing formula, which allocates 52.68% to the federal government, 26.72% to states, and 20.60% to local governments, aims to promote fiscal federalism and decentralize revenue collection ¹.

Under the new proposal, 60% of the states and local governments' share will be based on the principle of derivation, favoring states with higher resource generation. For instance, if N100 is available for distribution, the federal government will take N10, all 36 states will share N36 equally, and N54 will be distributed based on derivation.

According to Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, this change simplifies tax collection and lays the foundation for fiscal federalism, giving states and local governments more autonomy over their revenues.

However, questions remain about whether the federal government will also reduce its share of personal income tax (PIT), traditionally collected by states. Oyedele estimates that centralizing PIT collection could generate up to N50 trillion annually, providing N5 trillion for the federal government under the new 10% rule.

To compensate for the reduced FAAC allocation, the federal government plans to rely more on internally generated revenue (IGR) from its Ministries, Departments, and Agencies (MDAs), which already generate almost N1 trillion monthly.

The proposed reforms represent a significant step towards decentralizing revenue collection and promoting a more balanced fiscal structure in Nigeria. The success of these reforms will depend on how they are implemented and whether key stakeholders can reach a consensus on the new distribution framework.

Sources:

- Statement by Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, on X (formerly Twitter)

- Federation Account Allocation Committee (FAAC) reports ² ¹ ³