CHAPTER ONEINTRODUCTION1.1 Background of the StudyIn recent years, it has been observed that there is a growing concern towards greater fiscal decentralization even by nonfederal states. The traditional theory of fiscal federalism lays out a general framework for the assignment of functions to different levels of government and the appropriate fiscal instruments for carrying out these functions. At the most general level, this theory contends that the central government should have the basic responsibility for the macroeconomic stabilization function and for income redistribution in the form of assistance to the poor. In both cases, it is argued that the lower level governments have some basic constraints that would not allow them to perform (Oates, 1999).In a federal structure, adequate authority is given to each level of government to enable it perform its responsibilities without interference. In such cases there is the division of power between the central, states and local governments. Federalism as being practiced in developed countries such as the United States of America, will enhance unified, peaceful, political and socio-economic development. Federalism therefore, implies the existence in one country of more than one levels of government each with different expenditure responsibilities and taxing powers, it is essentially about government structure (Nwosu, 2010; Anam-Ndu, 2007). One of the most discussed issues in Nigeria is the fiscal federalism, this is because it has generated so many problems capable of threatening the corporate existence and continuity of the Nigerian state. The problems emanating from proper application of true federalism include total neglect of areas where mineral resources are exploited; criticism on the mode of determining equitable and acceptable revenue sharing formula; neglect of tax bases of various states and local government and the agitation for resource control. These factors have accounted for lack of rapid economic development of the country. This paper therefore inquired into the causes of dissatisfaction and violent agitation arising from fiscal federalism and the revenue allocation issues. In achieving this, the paper adopted the descriptive method of data analysis by relying on secondary sources for data gathering.The importance of revenue generation, allocation as well as its distribution towards maintaining both the existing and new socio-politico-economic structure in any economy be it centrally planned, market or mixed economies cannot be overemphasized. To this end, what revenue is to an individual or a firm is what it is to the government. Thus, revenue allocation and its distribution remain a vitally sensitive issue which continues to spark off reactions from all stakeholders at all times. This is more so in the sub-Saharan region and particularly in Nigeria where ethnic plurality and language heterogeneity characterize the country’s existence. The issues of resource control, revenue allocation and fiscal federalism have dominated discussions at various levels of Nigeria’s political debate. Like most federal systems, Nigeria has a revenue distribution system in which the federal government shares revenue with the states and local governments. Different formulas at different times have been adopted. Similarly, at different times, ad hoc commissions have been set up to determine the allocation formulae and criteria. Between 1946 and 1979, there were eight of such commissions on revenue allocation. These were: Phillipson (1946), Hicks Phillipson (1951), Chick (1953), Raisman (1958), Binns (1964), Dina (1968), Aboyade (1977), and Okigbo (1980). It was not until 1988 that a permanent body was created to monitor, review, and advise the federal government on RAS on a continuing basis. The new body, called the National Revenue Mobilization, Allocation, and Fiscal Commission, represents a structured attempt to replace the ad hoc approaches to effecting changes in the RAS. This body is enshrined in the 1989 Constitution. Despite these efforts, revenue allocation has remained a contentious issue among the three tiers of government in Nigeria. In the last eight years, the 36 state governments have been at daggers-drawn with the Federal Government over the formulation of a revenue sharing formula that would be acceptable to all the stakeholders. One major impact of this seemingly never ending controversy is the fact that fiscal federalism in Nigeria has not been able to contribute optimally to social and economic development. Despite the considerable increase in the number of administrative units, the rate of real economic growth has been low and the country’s per capital income has declined considerably over the years compared with the level that was attained in the 1980s. As the nation operates a new era of democracy under a federal constitution, there is the need to critically review the division of functions among the various tiers of governments, as well as the revenue sharing arrangements in order to substantially improve the delivery of public goods and services as well as promote real economic growth.The present study aims at providing answers to these immediate questions as well as serving as a platform for raising a number of pertinent issues as basis for further research into areas that are likely to be of great interest for policy analysis, political analysts, and the parliamentarians who have responsibility for creating states. Thus, the study specifically intends to analyze and conduct a comparative analysis of revenue allocation among geo-political zones, states and local governments and attempt to classify them using cluster analytical framework.The study’s contributions are in two-fold: first, employing cluster analysis to examine the state and local governments with similar (dissimilar) features in terms of revenue allocation using specific item of revenue such as statutory allocation, value-added tax, and net statutory allocation.Second, attempt is made to group these tiers of government based on financial resources available to them. The major problems affecting federal practice in Nigeria are: the issue of resources allocation, sharing and usage of the tax burden, the issue of what criteria should take procedure over the other in the sharing of federally collected revenue. All these and more has for long remained problematic as far as federal practice is concern in Nigeria. The issue of revenue allocation in Nigeria dated back to the Philipson commission at 1940, to 1979 constitution that provide the establishment of federal character principle and inl995 gives way to creation of federal character commission to ensure the implementation of federal character principle as preserved in the constitution. The 1999 constitution revealed that revenue allocation is in favor of the federal government and that of the criteria used in horizontal allocation of revenue among states has also been faulted.Problem arises as to which criteria should determine how revenue is to be divided horizontally. The problems arose between the southerners and northerners and each are of the opinion of criteria should be taken. The former emphasis in the principal of derivation, where the later emphasized on social needs. As a result of this divergent interest between these two sections of the country (southerners and northerners), revenue allocation has been politicized and this has been attributed to the cause of the social and political problems confronting the country. Even with 13% derivation provided for the oil producing region in section 162, subsection 2 of the 1999 constitution, the problem still remains unsolved, hence the persistence clamor for resources control by the oil producing communities. To Itself Sagay (200l)”….Federal system of government as presently practiced in Nigeria is problematic. Sectional interest: ethnic intolerance, religious bigotry, mutual mistrust and the bone on Nigeria politics. They also extended to revenue allocation and the causes of the various crises in the country is simply the issue of resources distribution and allocation”.