The Unintended Tax Burden of Environmental Regulation: Evidence From a Command-and-Control Enforcement Reform

Environmental regulation can affect firms’ tax burdens through changes in financing and fiscal support. Using A-share-listed firms from 2010 to 2023, we compare firms in heavily polluting industries with firms in other industries before and after China’s revised Environmental Protection Law took effect in 2015. We estimate that the reform increased treated firms’ actual tax burden by 0.4 percentage points, or 5.9% of their pre-reform mean. Treated firms also recorded lower interest expenses and tax refunds relative to assets, consistent with a weaker debt tax shield and reduced tax-refund support. The main result is robust across alternative samples, outcome measures, trend specifications, and inference procedures. Estimates are larger for non-state-owned firms and firms in cities with higher fiscal pressure. These findings document an indirect fiscal consequence of command-and-control enforcement that conventional regulatory-cost assessments may overlook.