Intergovernmental Transfers and Own Revenues of Subnational Governments in Nigeria

Abstract

The paper explores the effect of the unconditional intergovernmental transfers on own revenues of subnational governments in Nigeria. Models of intergovernmental transfers predict that transfers from the central government to subnational governments amount to a tax reduction on the residents of subnational jurisdictions as transfers lead to a lower effort in own revenue mobilisation by subnational governments. This study employs the instrumental variables (IV) model to establish the impact of annual variation in intergovernmental transfers on own revenues of subnational governments. The study reveals that states depend mainly on transfers from the federal government to run their operations; and, transfers to second-level administrative units, states in Nigeria crowd out own revenues. A 1 percent rise in transfer leads to about 0.64 percent reduction in own revenues per capita. Also, the drive for the collection of revenues nosedives during the election years. The findings are anchored on the political economy of decentralisation in Nigeria.

Keywords: Federalism, Intergovernmental transfer, revenue, subnational government, instrumental variables

JEL Classification: H29, H71, H77