As an important means to adjust the distribution of financial resources among governments, tax sharing has a profound impact on the behavior of local governments. Different institutional arrangements will present different financial incentive effects, which are crucial to ensuring and enhancing the sustainable development of local finance. This paper takes the 2016 VAT sharing reform as the exogenous shock of fiscal incentives, constructs anintensity difference-difference model, uses the fiscal response function to measure the local fiscal sustainability index, and empirically tests the impact of the VAT sharing reform on local fiscal sustainability. The study finds that the VAT share reform has a significant promoting effect on local fiscal sustainability mainly by encouraging local governments to support the development of industrial enterprises andcarry out tax competition. Heterogeneity studies show that the promotion of VAT share reform on local fiscal sustainability is more pronounced in regions with higher levels of industrialization, better resource endowments, higher fiscal self-sufficiency rates, or lower market barriers. Further research shows that there is a certain “Matthew effect” in the VAT share reform in general,and it fails to play a good role in balancing horizontal financial resources.