Unintended Results: Inter-Provincial Differences in Environmental Protection Tax Rates and Relocation Strategies of Polluting Enterprises

Abstract

Abstract The Environmental Protection Tax Law that took effect in 2018 gave local authorities a certain amount of discretionary power to set the local rates for environmental protection tax. The inter-provincial gradient tax rates pattern may induce strategic relocation of enterprises, leading to unintended policy results. Combined with the data on trans-regional investment of listed companies, this paper employs the Difference-in-Difference (DID) approach to study the impact of inter-provincially different environmental tax rates on the trans-regional migration of polluting enterprises. The study shows that due to the regional differences in the tax rates, the polluting enterprises opt for the relocation strategy of “avoiding high tax rates and opting for low rates”, setting up more subsidiaries in regions with relatively low tax rates. Further research demonstrates that the trans-regional migration induced by different tax rates can help reduce production costs and increase corporate profits, while dampening the corporate enthusiasm for green innovation in the short term and resulting in pollution transfer. This paper reveals the unintended policy effects that may derive from the environmental tax reform, providing concrete proof for the comprehensive evaluation and understanding of the actual policy effects of existing environmental tax reform.