Nigeria’s North-South Divide Threatens Tax Reforms and Economic Stability

The tax reform proposals of Nigerian President Bola Tinubu, aimed at modernizing the nation’s revenue system and addressing regional disparities, have instead deepened the country’s North-South political rift. The reforms, which include reducing corporate taxes and overhauling VAT distribution, face fierce opposition from northern states, whose leaders argue the changes will exacerbate economic inequities. This clash underscores a critical challenge for investors: can Nigeria reconcile its regional divisions to unlock growth, or will political gridlock stifle progress?

The Tax Proposal: Ambition vs. Reality

Tinubu’s four tax bills—introduced in late 2024—seek to simplify Nigeria’s chaotic tax system, cut corporate taxes from 30% to 25%, and revise VAT distribution to favor states with lower per capita income. The reforms also aim to shield small businesses and low-income earners, while consolidating tax administration under a new Nigeria Revenue Service. Proponents argue this will attract investment, reduce corruption, and fund critical infrastructure.

Yet a simulation by the Agora Policy Center revealed stark regional imbalances. Under the proposed VAT formula, 22 states would gain revenue, but 14—including 10 northern states—would lose. For instance, Lagos, Nigeria’s economic engine, would lose N7.44 billion in VAT revenue, while Kano and Sokoto (both in the North) would gain N1.59 billion and N3.06 billion, respectively. Southern states like Delta and Ekiti also saw gains, but northern states such as Zamfara and Taraba faced losses of N344 million and a 26.49% revenue drop.

The North-South Divide: Roots and Reactions

Northern opposition has crystallized around fears of marginalization. The Northern Governors Forum (NGF), led by figures like Borno’s Babagana Zulum, claims the reforms favor the South, where most economic activity occurs. “This is a Southern plot to siphon resources northward,” accused former Kano Governor Rabiu Kwankwaso, echoing a sentiment rooted in historical grievances. The North’s reliance on agriculture and a larger population with lower GDP per capita amplifies its vulnerability to revenue cuts.

Southern states, despite Lagos’s projected loss, broadly support the reforms. Lagos Governor Babajide Sanwo-Olu endorsed the VAT redistribution as a step toward equity, even as his state risks losing funds. The divide reflects deeper tensions: the North’s political dominance in national institutions clashes with the South’s economic clout.

Cultural and Fiscal Fault Lines

Beyond economics, the reforms have sparked cultural backlash. A proposed inheritance tax drew condemnation from Islamic leaders like Sheikh Ahmad Gumi, who argued it conflicted with Sharia principles. Meanwhile, northern lawmakers demanded the bills be translated into Hausa to address “misunderstandings,” highlighting communication gaps between policymakers and citizens.

The reforms also threaten to dismantle agencies like the Tertiary Education Trust Fund (TETFUND) and National Agency for Science and Engineering Infrastructure (NASENI), which northern leaders view as vital for development. “This is about more than taxes—it’s about who controls Nigeria’s future,” said Gombe Governor Inuwa Yahaya.

Political Calculus and Market Risks

The legislative battle mirrors Nigeria’s broader governance challenges. The National Assembly has stalled debates, with northern lawmakers threatening to block the bills. Tinubu’s ruling All Progressives Congress (APC) lacks a majority, forcing reliance on the opposition People’s Democratic Party (PDP)—a risky alliance given partisan squabbles.

For investors, the uncertainty is palpable. The naira’s 40% depreciation in 2024 and fuel subsidy removal have already strained businesses. Prolonged gridlock could deter foreign direct investment, particularly in infrastructure and manufacturing, sectors critical to diversifying Nigeria’s oil-dependent economy.

Conclusion: A Nation on the Fiscal Precipice

Tinubu’s tax reforms face an uphill battle. The North’s opposition, rooted in both economics and identity, threatens to derail progress toward a more efficient tax system. However, the Agora Policy data shows that without equitable resource redistribution, Nigeria’s regional disparities will worsen. Southern states, despite their economic strength, cannot sustain growth while northern underdevelopment fuels insecurity and political instability.

The path forward requires compromise. If the reforms pass, Nigeria could unlock an estimated N2.5 trillion in annual tax revenue by 2026, per Treasury projections, funding infrastructure projects like the Lagos-Ibadan rail line and renewable energy initiatives. But if they fail, the country risks a deeper fiscal crisis, with states unable to fund education or healthcare.

The stakes are existential. As political scientist Kayode Soremekun notes, Nigeria’s elites often exploit regional divisions to avoid accountability. For investors, the message is clear: bet on Nigeria’s potential, but brace for volatility. The nation’s economic future hinges not just on tax codes, but on whether its leaders can transcend the North-South divide.

The road to fiscal unity is long, but the cost of failure—for investors and citizens alike—is too high to ignore.