This paper examines how ownership type and institutional environment affect firm taxation. Using a sample of Chinese-listed firms from 1999 to 2006, we find that private firms enjoy a lower effective tax rate than local state-owned enterprises. In addition, the preferential taxation of private firms is associated with local government incentives to promote local economic growth. We find that private firms located in regions with a lower level of privatization receive preferential tax treatment. Our results also suggest that decentralization and interjurisdictional competition lead to financial interdependence between local governments and private firms.