It is no secret that Lagos is no state’s mate when it comes to income and that Lagos earns the bulk of its revenue from taxes is also pretty common knowledge. In previous <a href="https://www.stears.co/premium/article/is-lagos-a-great-city-to-live-in/">articles</a>, we’ve <a href="https://www.stears.co/premium/article/how-does-lagos-state-spend-its-money/">analysed</a> if all the income generated within the state is worth it for Lagos residents. 
 
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Key takeaways:
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Lagos has consistently generated the highest internal income among Nigeria’s states. For instance, the value of Lagos’ income in 2020  alone was higher than the total IGR for Ekiti, Oyo, Ondo, Ogun, and Osun from 2019 to 2021
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The primary sources of this income growth are tax and non-tax income. However, tax income contributes over 80% of total IGR yearly, and PAYE, a more stable income tax source, provides the yearly boost to tax income.
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<li class="p-fmb28gXn9J9uQAuWiHEv9x">But with barely five million people in the tax net, of which only 16% are tax compliant, Lagos needs to do the work</li>
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It isn’t. Infrastructure growth from transportation to education is happening too slowly compared with Lagos's wealth level, taking away the delight of living or working in Lagos.
Yet, year after year, there has been a steady growth of tax payments in Lagos, which has boosted the state’s impressive revenue growth. 
In the last 22 years, Lagos’s IGR has multiplied almost 30 times from ₦15 billion in 1999 to nearly ₦500 billion in 2021, going by records from the Lagos state and National Bureau of Statistics (NBS). 
 
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The value of Lagos’ income is even more impressive. If you added the total IGR for Ekiti, Oyo, Ondo, Ogun, and Osun from 2019 to 2021, you would get ₦414 billion. Lagos’ IGR for 2020 alone was ₦419 billion, slightly higher than this figure. However, what remains to be seen are the primary sources of this income growth.
What makes up Lagos’ IGR, what are these components’ contribution levels, and what drives the performance of these revenue sources? These are the questions we will unpack with charts in this article. 
 
<h4>Taxes, Lagos’ cash cow</h4>
There are two primary sources of internal income for Nigerian states—tax and non-tax (also known as revenue from ministries, departments and agencies (MDAs)).
For Lagos, taxes are its major revenue source.  In the last six years, taxes have accounted for about 86% of Lagos’ total revenue. 
 
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A combination of several taxes makes up the total tax for Lagos state, and when we break this down, we see that the king of taxes is Pay As You Earn (PAYE). 
 
 
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Pay as you earn is the personal income tax all Lagos workers must pay to the state. Considering Lagos’ population, the general assumption is that PAYE should be a high-income source.
This assumption is not wrong. 
However, the dominance of PAYE among other revenue sources is not peculiar to Lagos. The highest source of most states’ internal income is also from PAYE. For instance, the average contribution of PAYE to IGR in Nigeria’s other five southwestern states in the same six-year period is 54%. The outlier here is Ogun state, where PAYE’s average contribution is 39%, and the state’s ministries, departments, and agencies contribute the bulk (46%) of income. 
Interestingly, Ayodele Subair, the Lagos Inland Revenue Service executive chairman, said only nearly <a href="https://www.vanguardngr.com/2020/01/only-18-75-lagos-residents-are-registered-taxpayers-lirs/#:~:text=Lagos%20Inland%20Revenue%20Service%20(LIRS,18.75%20percent%20are%20registered%2C%20taxpayers.">5 million</a> people are registered taxpayers in Lagos state.
This figure looks like a reasonable achievement compared to the number of employed Lagos residents. Most recent employment data from the NBS shows that at least 3.4 million people in Lagos had a form of employment—either working between 1 to 40+ hours in 2020. It’s worth caveating that 2020 was when many people lost their jobs and that unemployment figures in Lagos tend to be quite high, with at least 30% of the labour force being unemployed. However, having five million registered taxpayers don't mean they are all paying taxes.
According to the state, only about <a href="https://guardian.ng/news/lagos-says-only-700000-of-4-8m-registered-taxpayers-remit-taxes/">700,000</a> of the almost 5 million registered taxpayers pay taxes. This is because many taxpayers find it difficult to comply with the terms. For instance, before the e-payment tax registration was introduced in August 2022, employers needed to remember payment references and codes to fill in taxes in designated banks. With the newly introduced system, taxpayers can file tax returns online, get their receipts, and access an online calculator to assess taxes directly.
Nigeria’s general tax apathy is fuelled by mistrust of the government and low law enforcement measures. Only about <a href="https://www.ft.com/content/5751dc5c-6719-11e7-8526-7b38dcaef614?mhq5j=e1">6%</a> of the Nigerian population meets their tax obligations, which is partly responsible for Nigeria's <a href="https://www.stears.co/premium/article/nigerias-ambiguous-tax-laws-breed-elusive-taxpayers/">low</a> tax-to-GDP ratio of 8% compared to South Africa's 28%.
Still, LIRS aims to increase this number of tax registrants to about eight to ten million soon to widen tax revenue further.
As we’ve seen, this projection means little to taxpayers. With only a few of the identified 10 million taxable workers contributing to the tax revenue growth, it puts an unnecessary strain on taxpayers, especially when there is a tax increase.
 
<h4>Direct assessment as a buffer</h4>
That said, another source of income tax is direct assessment. This type of tax captures self-employed people, mostly professional and informal sector workers. Although the state has not announced absolute numbers for this category of taxpayers, comparing the growth rate of direct assessment revenue to other revenue sources gives us a hint of its performance.
From the chart below, we see that revenue from direct assessment has increased by 14%, from ₦10.5 billion in 2016 to ₦17.1 billion in 2020—the best performance over the last six years. One caveat here is the <a href="https://en.wikipedia.org/wiki/Low_base_effect">low base effect</a>. It's easier to see a much bigger percentage increase in revenue generated via direct assessment—their absolute values are much smaller than PAYE figures in the hundreds of billion. 
 
<img alt="" src="https://prod-001.s3.amazonaws.com/media/articleImages/8AEC8743-6156-49C5-B9B1-2217005CF757.png"/> 
 
Direct assessment revenue <a href="https://sowprofessional.com/direct-assessment-tax-administration/#:~:text=2%20August%202020-,Direct%20Assessment%20Tax%20Administration,%2C%20Surveyors%2C%20Consultants%20etc).">accounts</a> for income from high net worth individuals and self-employed workers. It also comprises artisans like vulcanisers, who might not even have registered businesses.
However, when we probe deeper into the data, we see that the growth rate on direct assessment revenue boost is actually from one year—2018—when revenue grew by 37%. 
 
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The state <a href="https://lagosstate.gov.ng/blog/2018/04/24/lagos-igr-hits-n103-4billion-in-first-quarter-y2018/">attributes</a> the revenue growth in 2018 to improved efficiency by the state’s tax body, LIRS. And though the tax revenue from direct assessment was reduced by less than 1% in 2019, it picked up in 2020 and attained almost 85% of 2020 figures as of 2021 half-year.
What the data tells us, however, is that when we compare both income taxes, PAYE is a more stable revenue source than direct assessment. This makes sense, considering that people who directly assess themselves to pay taxes take on jobs without regular income.
 
<img alt="" src="https://prod-001.s3.amazonaws.com/media/articleImages/5F4FACBA-871C-4305-8BBD-285285BD6D12.png"/> 
 
 
Taxes are the major source of Lagos’ income, and PAYE is the tax source doing the most work, with barely five million people in the tax net, of which only 16% are tax compliant.  
 
<img alt="" src="https://prod-001.s3.amazonaws.com/media/articleImages/6D265C00-BFA4-4BBA-987F-61286D9041F5.png"/>
 
The above chart shows that the story is similar across southwestern states. With salaried workers, tax collection is easier and more reliable. 
 
<h4>Beyond taxes</h4>
But Lagos has other revenue sources. For simplicity's sake, we will call them non-tax revenue, and the major drivers of this revenue source are the state’s ministries, departments and agencies (MDAs). Ogun’s MDAs contributed an average of 46% to the state’s overall IGR compared to 14% in Lagos. 
While this income category is small compared to overall IGR, it has proven to be a more reliable source of income, especially during periods of economic downturn like the 2020 Covid pandemic. The revenue generated from MDAs not as prone to shocks as people’s incomes which will directly affect tax when such income reduces or stops altogether. Vehicle registration and license renewals, court fees to get married or divorced and hospital fees for health care are necessities that people must pay for before receiving such service.
These examples are income sources for different MDAs. In 2020, Lagos’ IGR growth was driven largely by a 31.43% growth in MDAs revenue from ₦39.4 billion in 2019 to ₦52 billion in 2020. 
The growth in road taxes was almost as high as MDA revenue despite the 2020 lockdown. But this is not surprising considering that the state’s curfew was only within specific hours for most of the year. In addition, a city as congested as Lagos still had many vehicles on the move during working hours. 
 
<img alt="" src="https://prod-001.s3.amazonaws.com/media/articleImages/A761C55C-2718-46AD-985C-77313CA4820C.png"/> 
 
 
Whereas income taxes—PAYE and direct assessment—only grew by 3% and 7% from ₦270 billion and ₦16 billion in 2019 to ₦278 billion and ₦17 billion in 2020, respectively.
So, what kind of agencies and revenue sources can provide a more stable source of income, and why is their revenue contribution not higher? One obvious agency is the LIRS, which is saddled with all the tax collection tasks we analysed earlier. Let’s see how other agencies perform when it comes to growing the entire MDA revenue pot.
 
<h4>LIRS vs the rest</h4>
MDA revenues accumulate when someone receives a service or good or pays for a law violation of the state government. Think of the registration for your car, the access to put up a sign advertising your business or the fine for driving on the BRT lane.
This category of non-tax revenue comes in the form of levies, licences, fines and fees. And according to the Lagos state 2021 revenue performance <a href="https://lagosstate.gov.ng/LagosStateGovernment-Q4BPR-SFTAS-Jan28th2022-8.30pm.pdf">report</a>, non-tax revenue amounted to ₦149 billion, with fees alone contributing ₦82 billion or 55%—the lion's share. 
 
<img alt="" src="https://prod-001.s3.amazonaws.com/media/articleImages/B01490BB-0138-46AE-B93B-2F266E67C5A6.png"/>
 
Each of the non-tax revenue categories is further broken down into line items. For instance, there were almost 100 different fees paid by Lagos residents in 2021. And the most popular were survey, planning &amp; building, land use, stamp duty, billboard advertisement and development fees. Together they made up over 50% of fees collected by the state last year.
The pie chart above shows that earnings were another significant non-tax revenue source for Lagos in 2021. Earnings amounted to ₦22 billion or 15% of this revenue category, buoyed by line items such as tolls, medical services, consultancy services and other commercial activities. This might sound strange, but Lagos also makes money from its hospital,  medical centres and advisory services such as tax administration.
However, one way to gauge the performance of these MDAs is to benchmark their output with what is in the budget—i.e., what the state government expected each MDA to deliver in a given year.
Going by the latest (2021) figures, the performance rate for non-tax revenue sources, such as licenses, fees, levies etc., is 55% on average, which is lower than tax revenue’s performance rate of 90%. For instance, the revenue from selling items such as government vehicles, drugs and medications or even journal publications was ₦2.5 billion, representing only 23% of the expected  ₦10 billion revenue from sales for 2021.
The chart below shows rent &amp; leases had the highest non-tax revenue performance, meeting about 87% of its expected income, thanks to high income earned from renting government buildings.
 
<img alt="" src="https://prod-001.s3.amazonaws.com/media/articleImages/F7ECF76F-1BBA-47E3-8A8C-610939E3EC8F.png"/>
 
Overall, over 100 state agencies are responsible for the performance of these non-tax revenues. The LIRS, responsible for the bulk of income for most years and about ₦428 billion in 2021, is one agency that strives to meet its revenue targets. Last year, the agency recorded an 84% performance.
In comparison, many ministries and agencies under them are underperforming on budget performance. For instance, the transport ministry earned ₦16 billion in revenues last year. This was on the back of mixed perfromance of famous agencies like the Lagos State Metropolitan Area Transport Authority (LAMATA) that raked in just ₦82 million last year—about 13% of its expected performance last year. On the other hand, another transport agency like the Motor Vehicle Administration Agency (MVAA), which is responsible for the collation of people applying for driver's licence, recorded an 82% performance, raking in about ₦9 billion last year. 
In summary, revenue generation for Lagos is important in closing the state’s huge infrastructure deficit gap and meeting other socio-economic needs. I started this article with a reminder of how the state is working too slowly to close this gap, and now we’ve seen other areas beyond revenue expenditure that also need Lagos state’s attention. These internal sources are important in boosting revenue, from improving tax compliance to widening the tax net and making MDAs more productive.

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