Amid China’s complex economic transition, stable growth has emerged as a central policy objective, with fiscal and tax policies playing a critical role. Taking the 2016 VAT 50:50 sharing reform as a quasi-natural experiment, this paper uses an intensity DID model and city-level panel data from 2009 to 2023 to examine how tax-sharing incentives affect local economic fluctuations.

The results show that tax-sharing incentives significantly suppress local economic fluctuations. From an economic perspective, this effect is more pronounced in regions with underdeveloped e-commerce, slower economic growth, economic downturns, and irrational industrial structures; from a fiscal perspective, this effect is stronger in regions with larger deviations between expenditure responsibilities and fiscal resources, higher uncertainty in transfer payments, and stronger fiscal sustainability. Mechanism testing reveals that tax-sharing incentives suppress fluctuations in both real estate investment and industrial structure upgrading. They also help mitigate myopia in local government behavior by prompting more balanced land allocation and improving market entry and exit mechanisms.

This paper has the following contributions: (1) It takes the 2016 VAT 50:50 sharing reform as a quasi-natural experiment, expanding research on the macro effect of tax-sharing incentives and the determinants of economic fluctuations. (2) It innovatively examines the synergistic effect between local governments’ countercyclical regulation and tax-sharing incentives in smoothing economic fluctuations, revealing a central-local coordination mechanism in fiscal policies. (3) It investigates not only direct channels but also the shift away from myopia in local government behavior, and also provides in-depth insights across economic and fiscal dimensions, enhancing the policy relevance of the conclusions.