Abstract

Tax expenditures (TE) remain an area of contention in fiscal policy debate: it is seen as a legitimate instrument for investment promotion and economic stimulus that can expand the tax base over time; on the other hand, critics argue that the revenue forgone by TE implies that resources are diverted away from financing the Sustainable Development Goals (SDGs) without commensurate developmental benefits. This study empirically investigates the nexus between tax expenditures and the attainment of the SDGs in Nigeria, using quarterly time series data from January 2019 to December 2025. Given confirmed heteroskedasticity and serial correlation, the Newey-West heteroskedasticity and autocorrelation consistent (HAC) estimator is used as the primary basis for statistical inference, with Ordinary Least Squares (OLS) regression reported alongside as a robustness and coefficient-stability check. The study adopts two regression specifications: a baseline model examining the unmoderated effects of GDP, tax revenue, tax expenditure, debt servicing, and foreign aid on SDG outcomes, and a moderated model with institutional quality (IQ) as a moderating variable. Model stability is confirmed by the Ramsey RESET test. The results indicate that tax expenditures negatively affect SDG progress in a statistically significant manner. Likewise, debt servicing constrains development outcomes. The results reveal positive relationships between GDP, tax revenue, and foreign aid with SDG performance, but the introduction of institutional quality as a moderator significantly diminishes these effects by 91.2%, 82.0% and 43.9% respectively, making the effects of tax revenue and foreign aid statistically insignificant. Weak institutional quality worsened the negative impacts of tax expenditure and debt servicing by 25.18% and 44.75%, respectively. These results validate the opportunity cost of tax expenditure policy in Nigeria. Lost revenue is a binding constraint to SDG financing and is compounded by severe institutional deficiencies that reduce the developmental returns to available fiscal resources. The study advocates for a holistic tax expenditure policy reform, underpinned by rigorous cost-benefit and opportunity cost analyses and institutional capacity building.