Does government fiscal pressure matter for firm environmental performance? The role of environmental regulation and tax competition

Abstract

Concerns about firm pollution have entered the global spotlight in recent years, emphasizing the central role that governments play in addressing this pressing issue Existing literature mostly focuses on the influence of government regulations on the environment, with limited attention given to the role of government fiscal pressure. Leveraging detailed firm-level data from 2000 to 2007, we investigate the causal effect of fiscal pressure, stemming from China’s Income Tax Sharing reform on the local environment. Employing a difference-in-differences estimation, we find that such fiscal pressure amplifies sulfur dioxide emission intensity, especially in non-state-owned, large-scale firms and small to medium-sized cities. We argue that this fiscal tension not only prompts local authorities to ease environmental regulations but also escalates a downward spiral in tax competition, fostering environments conducive to pollution, thereby deteriorating local environmental quality.