Nigerian states just lived through an extraordinary revenue windfall. Subsidy removal, FX unification, and a rewritten VAT formula pushed aggregate state revenue up 211%, from ₦4.99tn in 2022 to ₦15.53tn in 2025, according to BudgIT’s 2026 analysis of state finances in the post-subsidy years. Their dependence on federal allocations rose anyway. FAAC’s share of aggregate state revenue climbed from 68.7% to 73.3% over the same stretch, while internally generated revenue’s share fell from 31.4% to 26.7%. More money produced more comfort, not more independence. I described that subsidiary logic last year; the numbers now back it up.
But Kwara makes it difficult to blame all of this on incapacity. Its internally generated revenue nearly tripled in six years, from ₦30.6 billion in 2019 to ₦92.2 billion in 2025, through digitised collection, a wider taxpayer base, and fewer leakages, not a new federal deal. BudgIT moved the state from 10th to 3rd in its fiscal-performance ranking on the strength of that alone. Twenty-five other states still depend on FAAC for more than 80% of total revenue as of the first quarter of 2026. Twenty-six of the 34 states in the 2026 report can’t cover their own wage bill from what they collect.
Kwara proves the existing rules don’t make stronger fiscal performance impossible. The wider pattern suggests they don’t make it sufficiently necessary. Geography, security, and administrative capacity vary too much between Kwara and, say, Yobe to reduce this to a pure incentive story.
Why the restructuring argument keeps losing
For 25 years the answer to that gap has been restructuring. That usually means raising derivation (the share of resource revenue returned to producing states), devolving more of the existing revenue list, or redrawing the federation into stronger regions. In August 2026, the Pan Niger Delta Forum was back in Abuja making that case again: 15 autonomous regions, derivation lifted to 50%, VAT collection handed to states outright. It’s a newer label on an old fight. The vertical revenue formula of 52.68% federal, 26.72% state and 20.60% local has stood since the early 1990s, and the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) has been reviewing it, without a published new formula, since 2021.
It keeps stalling because redividing an existing pool creates an identifiable loser the day the new formula is announced, not because the underlying argument is weak. Every state comfortable with the status quo has a direct reason to resist, and there are more comfortable states than uncomfortable ones. Restructuring asks incumbents to vote for a smaller check. Building a coalition around that is difficult.
There’s a more useful question: not how to redivide what already exists, but what happens to the next unit of value a state creates.
Traditional fiscal federalism asks who should receive revenue. The more useful question is who has the authority and incentive to cause new revenue to exist, and that second question is far less developed in Nigerian public discourse than the first.
The next naira, and what the Constitution actually allows
The tidy version of that idea runs into a wall. Section 162 sweeps essentially all federally collected revenue into the Federation Account, with three narrow named exceptions, and requires the whole pool to be shared by a formula Parliament sets. There’s no clean way to carve a special retention right for one state out of federally collected tax revenue without reopening the exact formula fight this approach exists to avoid.
The 2025 VAT reform, which cut the federal share from 15% to 10% and changed how the states divide their share by giving greater weight to where consumption occurs, proves the National Assembly (NASS) can change that formula by ordinary law. It doesn’t prove a state can own new federal revenue outright. It’s still one pool, still one negotiation, just with better math.
The workable route is different: give states more economic activity they can regulate and tax on their own authority, so the revenue they help create belongs to them from the start rather than arriving later as a negotiated share. Pair that with federal instruments that also sit outside the Federation Account, such as matching capital, infrastructure co-investment, and credit guarantees, sized to whichever states actually put something on the ground.
The objective is to give states more ways to create revenue they control themselves. A larger share of federal money does not create the same incentive.
Nigeria already has this running. The Fifth Alteration to the Constitution didn’t simply move electricity to the states. It removed the restriction that had confined states to areas the national grid didn’t reach, letting them legislate for generation, transmission and distribution even where the grid operates. Under the Electricity Act 2023 that followed, 15 states have since transitioned regulatory control from the Nigerian Electricity Regulatory Commission (NERC) to their own commissions, and Enugu, Ekiti, and Ondo have issued generation and distribution licences on terms Abuja never set.
Railways moved the same way, in the same package of alterations, though that experiment is younger and less tested. These changes give states regulatory authority from which new revenue bases can develop. Nigeria’s federal and state authority over electricity still overlaps, especially around interstate transmission and the wholesale market. That overlap is exactly what the 2026 fight below is about.
China tried something close
China offers useful evidence of what happens when local governments get to keep more of the additional revenue they create. Under the fiscal-contracting system Beijing ran before its 1994 reform, the average province kept 89% of every additional yuan of tax revenue above a fixed remittance, and two-thirds of provinces kept all of it. The incentives were powerful, and provincial governments became aggressive promoters of local growth. Economists studying the period (Jin, Qian and Weingast, 2005) link the share of additional revenue provinces could keep directly to that shift in behaviour, whatever else was also driving China’s growth in those years.
The same experiment that demonstrated the power of the incentive also exposed its institutional weakness: Beijing eventually had reason to rewrite the bargain. The central government’s own share of total government revenue fell from 39% to 22% between 1985 and 1993, and total government revenue collapsed from 31% of GDP to 11.2%. Beijing rewrote the whole system in 1994 to take its money back.
And this is where the idea gets difficult. A governor being asked to fund permitting, land, and years of patient market-building is also being asked to bet that the federal government will still honor the deal once the investment starts paying off.
Nigeria isn’t waiting for a hypothetical version of this test. It’s running one.
The Electricity Act (Amendment) Bill now before the National Assembly would pull grid and wholesale market oversight back toward Abuja, in states that already built regulatory institutions and licensed private investment on the strength of the 2023 devolution. Regulators from 16 states formally argued in May 2026 that ordinary legislation shouldn’t be able to claw back powers grounded in a constitutional alteration.
If a state builds a power market, attracts investors, and develops a new revenue base only for Abuja to redraw the boundary after the investment is sunk, every governor and investor watching learns the same lesson: federal transfers are safer than productive experimentation.
The electricity fight therefore reaches well beyond electricity. Nigeria has spent a generation arguing about who deserves more of today’s revenue. The harder development question is whether states have enough control to cause the next naira to exist, and whether Abuja can be trusted to leave that control in place once they do.