In order to perform their statutoryfunctions,local governments need financial resources. They get their money from several sources but the most important are government grants and locally-imposed taxes, two sources which constitute about 80 percent of their total revenue.
The main sources of revenue may therefore be itemized as follows:
Major Sources Of Revenue For Local Government
Local rates and taxes
Head and poll tax
License and permits
1 – Grants
Every local government is, under the law, entitled to some grants or subventions from the central or state government. The proportion of a local government revenue coming in the form of grant varies from country to country. It is about 70 percent in Canada,USA, Sweden, Germany and Switzerland but less than 40 percent in Ghana. In Nigeria,local authorities almost virtually depend on government subvention for sustenance.
There are two types of grant. The first is a proportion of what a particular service costs. The amount paid depends on the importance of the service to the government. For example, the Federal Government assumed responsibility for the payment of salaries of primary school teachers after the introduction of the Universal Primary Education (UPE) in 1978.
The major defect of this form of grant is that it tends to favour the rich councils more than the poor ones. The other type is the block or equalization grant, which is given to all councils Whether poor or rich, large or small. It is usually based on criteria like population, size, etc. This is the method commonly adopted in the allocation of subvention to local councils in Nigeria.
2 – Local Rates or Taxes
Local rates or taxes constitute a major source of income for local governments. The tax may be on individual income, property or any service. A rate is a payment made for a specific service. In Nigeria, the tax paid on property is called tenement rate and it is a major revenue earner for urban-based councils in Nigeria.
Head or poll tax is otherwise called capitation tax. It is usually a charge on those people whose income is small and not easily ascertainable.
4 – Special Levies
A special levy is imposed on all the inhabitants of a council area for a special purpose. Examples are education levy or market levy. It is easy to understand and pay this levy especially by the unsophisticated people because they know the purpose for which it is being paid. In Nigeria, the levy can only be imposed with the specific permission of the state government.
5 – Fees
Local governments also collect fees such as bicycle fees, vehicle license fees, and cart fees. Fees are also paid for the use of motor parks, market stalls, and slaughterhouses, etc. The real purpose for the payment of fees is to defray the cost of providing a certain service.
6 – Licences and Permits
Local councils grant licences such as dog licence, radio and television licence, firearms licence and liquor licence. The local governments generally have a poor machinery for the collection of these charges.
7 – Court Fines
Court fines also supplement the income of local councils. The principle is that court fines and fees should be paid to the local government. They are supposed to be used in maintaining the court.
A local government may engage in commercial activities such as transportation or may provide recreation centers to augment its income.
9 – Investment
Local governments whose officials are business oriented may invest part of their unused funds in buying shares or bonds.
10 – Loans
A local government may borrow money from financial institutions to execute specific projects. Generally, loans are taken to finance ambitious projects which grants or subventions may not be able to cover. Such projects include the construction of drainage system or abattoir. Before obtaining the loan, the project must be approved by the state government.