China’s population urbanization has been advancing steadily, with the urban-rural dual structure gradually evolving towards urban-rural integration. As socialism with Chinese characteristics enters a new era, the urban-rural gap persists significantly. Basic public services serve as the cornerstone of livelihood security, a crucial means for maintaining social equity and stability, and an essential foundation for narrowing the urban-rural gap and promoting integrated urban-rural development. Based on the panel data of 261 prefecture-level cities from 2000 to 2021, this paper constructs a mathematical model and a structural equation model to explore the mechanism of the impact of the equalization of basic public services on integrated urban-rural development. This paper integrates the Devarajan fiscal expenditure framework and finds that the scale and efficiency of expenditures on the equalization of basic public services positively impact the utility of the agricultural transfer population. Conversely, the tax burden and administrative expenditures exert a restraining effect. Central transfer payments enhance the perceived level of the equalization of basic public service by balancing regional resources. The household registration system reform shifts the benchmark of transfer payments from the registered population to the permanent population, thereby alleviating the shortage of services for the floating population. Special funds precisely motivate local governments to absorb the agricultural transfer population and optimize the equalization allocation of basic public services. The results of the structural equation model indicate that the equalization of basic public services and urban convenience significantly promotes integrated urban-rural development, while environmental pollution acts as an impediment. Fiscal expenditure and household registration reform are the core drivers for the equalization of basic public services. Due to policy timeliness and data limitations, the effect of special funds is not statistically significant. The robustness test validates the reliability of the conclusions and the correlation of special funds begins to emerge. This paper breaks through the limitations of a single perspective and integrates fiscal, institutional, and policy variables to construct a comprehensive model to reveal the non-linear impact of the equalization of basic public services on urban-rural integration. It emphasizes the “market-government” coordination mechanism and advocates releasing the potential of factor flow through structural reforms, providing an empirical basis for policy design.