Fiscal competition and soft budget constraints are the two core issues included in the Chinese-style decentralization system, which have a profound impact on the fiscal behavior of local governments. This paper incorporates the two into a unified analytical framework, analyzes the impact of fiscal competition on local fiscal sustainability from multiple dimensions by specifically distinguishing different fiscal competition modes and the manifestations of budget soft constraints, and examines their interactive effects. The study finds that first of all, fiscal competition, whether it is tax competition or expenditure competition, has a significant negative impact on fiscal sustainability. For different forms of budget soft constraints, the impact of transfer payments is uncertain, while land finance and urban investment bonds have significant inhibitory effects. Secondly, the interaction effect research shows that the interaction mechanism between transfer payments and fiscal competition is conducive to fiscal sustainability, while the interaction between land finance and urban investment bonds and fiscal competition is not conducive to fiscal sustainability. Thirdly, regional heterogeneity studies show that compared with developed regions, fiscal competition and transfer payments have a greater positive effect on fiscal sustainability in less developed regions, while urban investment bonds have a greater negative effect, and the regional differences in land fiscal impact are not obvious. Finally, the benign interaction mechanism between transfer payments and spending competition is more pronounced in less developed regions. The negative impact of the interaction mechanism between land finance and expenditure competition is not regional heterogeneity, and the interaction mechanism between urban investment bonds and tax competition is not conducive to the fiscal sustainability of less developed regions. This paper designs local fiscal financing methods in a differentiated way, gradually implements risk prevention and control measures and further deepens the fiscal and taxation system.