Environmental Protection Tax and China’s Economic Growth: Boost or Slowdown?

This paper explores the impact of China’s environmental protection tax reform on economic growth through empirical research. Using the “fee to tax” policy implemented in China in 2018 as a natural experiment, the analysis is conducted using a strengthened double-difference (DID) model. It is found that environmental protection tax reform has a significant positive impact on regional economic growth, and this conclusion still holds after several robustness tests. In order to explore the mechanism of environmental protection tax in-depth, this paper analyzes the three dimensions of science and technology innovation investment, foreign direct investment, and tax administration intensity. The results show that environmental protection tax does not promote technological innovation of enterprises as expected, but may instead inhibit R&D and innovation activities by increasing the cost pressure on enterprises. The positive impact of environmental protection tax on economic growth is mainly realized by increasing the intensity of tax administration. Furthermore, this paper analyzes the heterogeneity in urban geographic locations and administrative levels, finding that environmental protection taxes have a significant positive effect on economic growth in central and northeastern regions and in cities with lower administrative levels, while they have a negative effect in the eastern region and in cities with higher administrative levels.