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Don't Believe Uber—Massachusetts' New Ridesharing Tax Is Terrible

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Don't Believe Uber—Massachusetts' New Ridesharing Tax Is Terrible

August 29, 2016

Massachusetts recently passed a law that places a 20-cent tax on each ridesharing trip in the state for the next ten years. Believe it or not, five cents from this tax goes directly to the taxi industry. Yes, you read that correctly—Uber riders in Massachusetts have to pay more to prop up the failing taxi industry.

In the past, ridesharing’s opponents used overinflated claims of protecting public safety to justify their pushes for greater regulation. Now, apparently the argument for direct subsidies to the taxi industry is enough, as Massachusetts’s ridesharing law does not even attempt to connect the additional charge to made-up public safety concerns.

This tax is a way to pay off the losers—in this case the taxi industry, which is losing riders to clear, cheaper Ubers and Lyfts. Yet paying off the losers discourages innovation and adversely affects consumers.

Surprisingly, both Uber and Lyft praised the new law for supporting “innovation.” The companies are behaving in a politically-correct manner to avoid more draconian regulations, such as those that were passed in Austin, Texas. Yet the per-ride tax sets a terrible precedent, both for ridesharing and innovation.

As proof, consider what Uber’s critics are saying about the law. Scott Solombrino, a spokesman and executive for taxi companies, said, “Massachusetts now has one of the toughest laws on the books, and I think it’s going to become a template for other states.” Translation: Uber riders, higher fares are coming to a city near you .

According to the law, this fee cannot be “charge[d to] a transportation network rider or a transportation network driver.” However, all taxes are paid by consumers, workers, or investors. Considering that Uber, America’s largest ridesharing company, just started turning an average per-ride profit of 19 cents in the United States (before accounting for interest on debt, taxes, and employee equity compensation), it is clear these costs will be paid for by higher fares or lower payments to drivers.

Massachusetts is already has the 12th highest tax burden per capital in the nation. No one believes that the 20-cent tax will go away after is slated decade of existence. To paraphrase the Nobel Prize-winning economist Milton Friedman, nothing is more permanent than a temporary tax.

Boston caps its number of taxis at 1,825. This may seem to be a lot, but the city of Boston has 667,000 residents. As the Institute for Justice’s Nick Sibilla explains, the value of Boston taxi medallions fell from $700,000 in 2014 to less than $200,000 today, as alternatives such as Uber became more popular.

This is similar to the approach used by New York City since the 1930s, as the number of yellow taxis there is capped at 13,587. Ridesharing’s rise has also reduced the price of New York City yellow taxi medallions. Though the price for a medallion reached $1.3 million in 2013, the price is around $600,000 today.

Before people feel sorry for taxi drivers, a few common misconceptions need to be clarified. First, taxi medallions are not primarily owned by individual, hardworking entrepreneurs. Rather, large firms buy up medallions with highly-leveraged financing. Then, the owners lease out the medallions for use by individual drivers. This is why New York City has four licensed medallion drivers for each yellow taxi medallion. The use of leveraged financing allows taxi moguls who own many medallions to bid high at auctions in order to drive up the sale price (and thus make their other medallions appear more valuable on paper). This approach helps to explain why medallion prices about doubled in major cities from 2009 to 2013.

The other misconception is that ridesharing services are stealing from taxi medallion owners by encroaching on their government-granted monopolies. For decades, prearranged for-hire vehicle rides (ridesharing’s category) have faced different sets of regulations than taxis. And this is for good reason—holding up one’s hand on the side of the road while hoping that a taxi drives by is not the same as pressing a button on a smartphone from inside a building or arranging a ride in advance from a car-hire firm. This much was affirmed by the Queens County Supreme Court when taxis and their financial backers unsuccessfully challenged ridesharing services’ right to operate in New York City.

Massachusetts’ law was championed by Republican governor Charlie Baker. Baker’s stance could show that he is hostile to innovation when it threatens a politically favored industry, or it could show that he is trying to head off more harmful legislation form the Democratic legislature.

Taxing ridesharing services to subsidize their competitors in the taxi industry is similar to forcing cellular service providers to directly subsidize phone booths. If taxis cannot compete with ridesharing because of antiquated regulations that limit their competitiveness, that is an argument for deregulation of taxis—and Massachusetts had a chance to accomplish this. Instead, the high-tax state chose to give in to special interests and tax its residents.

 

Jared Meyer is a fellow at the Manhattan Institute for Policy Research and the author of Uber-Positive: Why Americans Love the Sharing Economy (Encounter Books, June 2016). Follow him on Twitter here.

This article originally appeared in Forbes

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