Can Tax Incentives Drive Green Sustainability in China’s Firms? Evidence on the Mediating Role of Innovation Investment

Excessive corporate use of fossil fuels has significantly worsened global air quality. In response, many governments, including China’s, have implemented tax incentives to promote sustainable development, though their effectiveness at the firm level remains unclear. This study empirically examines the relationship between tax incentives and corporate green transition using a panel of 30,483 firm-year observations from Chinese A-share non-financial listed firms spanning 2009–2023. We construct a Green Sustainable Development Performance (GSDP) index based on green patent applications and environmental disclosure and identify innovation investment as the main transmission mechanism. The results show that stronger tax incentives are associated with higher GSDP scores. This relationship is largely driven by innovation: after controlling R&D input, the direct effect of tax incentives declines, while the indirect effect through innovation remains both statistically and economically significant. The effect is more evident in large firms and those in eastern provinces, but weaker in regions with higher financial constraints with limited time lags. The findings offer practical implications for designing targeted, verifiable, and innovation-oriented tax instruments to foster high-quality, sustainable corporate development.