Neural circuits involving midbrain dopaminergic (DA) neurons regulate reward and goal-directed behaviors. Although local GABAergic input is known to modulate DA circuits, the mechanism that controls excitatory/inhibitory synaptic balance in DA neurons remains unclear. Here, we show that DA neurons use autocrine transforming growth factor β (TGF-β) signaling to promote the growth of axons and dendrites. Surprisingly, removing TGF-β type II receptor in DA neurons also disrupts the balance in TGF-β1 expression in DA neurons and neighboring GABAergic neurons, which increases inhibitory input, reduces excitatory synaptic input, and alters phasic firing patterns in DA neurons. Mice lacking TGF-β signaling in DA neurons are hyperactive and exhibit inflexibility in relinquishing learned behaviors and re-establishing new stimulus-reward associations. These results support a role for TGF-β in regulating the delicate balance of excitatory/inhibitory synaptic input in local microcircuits involving DA and GABAergic neurons and its potential contributions to neuropsychiatric disorders.