The objective of the study is to evaluate the effect of the Nigerian tax policy on the ability of local governments to raise and spend money in discharge of their statutory responsibilities. The investigation was prompted by the fact that local governments seem to be carried away by the euphoria of the periodical statutory allocations from the Federation Account to the extent that they are blinded towards the potential of fiscal operations that would make them less dependent on the statutory allocations. The study therefore re-awakens the senses of local government administrators to the need to exploit more efficiently the opportunities that come with the recent national tax policy. The study is anchored on the Decentralization Theory as postulated by Richard Musgrave (1959) cited in Arowolo (2011). The study adopted a descriptive approach. The secondary data were analysed by means of Ordinary Least Square regression and by employing the Chow Test of structural stability it was established that the tax policy which came into operation in January 2010 has a significant impact on the fiscal operation of local governments in Imo State. Furthermore, the study found that the tax policy had a significant positive effect on the expenditure of local governments, for instance, for Owerri-Municipal Local Government, a unit increase in tax revenue brought about one million naira increase in total expenditure of the local government. It was also found that the tax policy improved the ability of local governments to raise revenue through various forms of taxes. Hence local governments would fare better when they fully avail themselves to the opportunities within the tax policy which make fiscal operations easier and more efficient. The implication of the result is that if local governments do not become enthusiastic in exploiting the benefits of the tax policy, they will remain inefficient in the discharge of their statutory functions. The study therefore recommends among others, that local government authorities should be more proactive in the business of fiscal operation by setting targets on the level of tax revenue to be realized within a particular period and reviewing same periodically.