Environmental tax reform and corporate tax avoidance: A quasi-natural experiment on China's environmental protection tax law

The implementation of China's Environmental Protection Tax Law (EPTL) in 2018 granted local governments the autonomy to adjust local environmental tax rates, raising concerns about potential unintended consequences. This study employs a time-varying difference-in-differences (DID) method to investigate the impact of the EPTL on corporate tax avoidance, utilizing data from China's A-share listed polluting firms spanning from 2015 to 2021. The findings reveal the following: a) the EPTL substantially intensifies tax avoidance among polluting firms in regions with rising environmental tax rates. The policy's impact is more significant in firms with preexisting extensive tax avoidance practices and does not significantly influence innovation inputs and outputs; b) this effect is primarily driven by companies with higher operational risks, political connections, and greater market bargaining power; c) the boosting effect of this policy is influenced by regional features and company characteristics; d) the findings indicate that tax avoidance increases firm value, explaining the motivation behind corporate tax avoidance. This study provides pivotal empirical evidence for assessing the unintended consequences of the EPTL.