With the rapid economic growth and accelerated industrialization process, the issues of water scarcity and pollution have become increasingly prominent in China, severely constraining the country’s environmental protection and sustainable development efforts. In order to promote the rational utilization of water resources and environmental protection, China initiated a pilot program for water tax in Hebei Province in 2016, subsequently expanding the pilot program to nine provinces and cities in 2017. The implementation of the pilot program for the transformation of water fee to tax has played a crucial role in promoting the environmental transformation and green innovation behaviors of heavy polluting enterprises. Based on panel data of Chinese listed heavy polluting enterprises from 2014 to 2021, this study uses propensity score matching, difference-in-differences models, and mediation models to empirically test the impact and mechanism of the water fee to tax reform policy on green innovation behavior of heavy polluting enterprises in pilot regions. Empirical conclusions show that the conversion from water fee to tax has a significant promoting effect on green innovation of heavy polluting enterprises in pilot areas, and R&D investment plays an effective mediating role in it. Heterogeneity analysis shows that the conversion from water fee to tax is more conducive to promoting the increase of invention patents in heavy polluting enterprises, especially for state-owned enterprises, highly market-oriented regions, and water-intensive industries. This study proposes policy suggestions for water tax reform and enterprise green development, including accelerating the promotion of water fee to tax reform policy nationwide, accelerating market-oriented construction, improving other environmental regulatory policies, and increasing R&D investment.