Promoting water conservation is crucial for building a modern ecological civilization. The water resource tax helps enforce water-saving policies and strict usage controls. The difference-in-differences (DID) method avoids endogeneity and omitted variable bias, making it ideal for policy evaluation. Using the 2017 pilot water tax expansion as a quasi-natural experiment, this study applies DID to assess the reform’s impact on total factor productivity (TFP) in water-intensive industries. The results indicate that the TFP of water-intensive enterprises in pilot regions increased by an average of 2.5% and that the reform has a positive and significant effect on TFP, with notable improvements in management efficiency and resource allocation. The findings further imply that the reform encourages better management practices, such as optimized water use and cost-effective resource allocation, rather than technological innovation as the main driver of improved productivity. This underscores tax reforms’ dual role in enhancing operational efficiency and environmental sustainability. The findings demonstrate water resource tax reforms’ potential to foster a more sustainable industrial sector, especially in water-stressed regions.