The full implementation of an environmental protection tax is an important measure to realize the goal of emission reduction and promote the comprehensive green transformation of economic and social development. In this paper, we take China’s environmental protection tax reform as a “quasi-natural experiment”, based on the data of A-share listed companies from 2013 to 2022, and utilize a differences-in-differences (DID) model to assess the impact of this policy on the performance of heavily polluting firms. The study finds that the environmental protection tax reform improves the performance of heavily polluting firms by 1.09% on average, which still holds after a series of robustness tests. Mechanistic analysis shows that environmental protection tax reform improves firm performance by accelerating firms’ digital transformation and increasing strategic green innovation activities. Heterogeneity analysis shows that the improvement of environmental protection tax reform on the performance of heavily polluting firms will be more obvious in large-scale firms and tax burden-raising regions. This paper provides micro-empirical evidence to further promote the improvement and implementation of the environmental protection tax system.