How Local Governments Covertly Transfer Fiscal Burdens: Tax Reduction Policies and Excess Employment in Chinese State-Owned Enterprises

This paper investigates how China's local governments leverage their controlled state-owned enterprises (SOEs) for fiscal relief during economic stress, using comprehensive data on listed SOEs from 2014 to 2023. Leveraging the 2017 Value-added Tax (VAT) reduction as a policy shock alongside intensity difference-in-differences (DID) and double machine learning (DML) approaches, we find that fiscally constrained local governments systematically transfer mandatory employment burdens to their SOEs. This off-budget fiscal strategy allows them to circumvent direct budget adjustments. Furthermore, although governments attempt to compensate SOEs through cost-effective measures like preferential procurement, these burden-shifting practices still significantly undermine the productive efficiency of the affected firms. Ultimately, this study demonstrates how political legacies from the planned economy transition continue to shape contemporary fiscal strategies. By revealing SOEs as tools for government intervention rather than fully market-driven entities, our findings offer critical policy implications for optimizing government-enterprise relations and enhancing SOE governance in unitary state systems.