Review of Opening Boston's Taxicab Marker, by Institute for Justice

REVIEW OF A REPORT

by Terry Smythe

(The views expressed herein are mine, and not necessarily those of my employer or my associates.)



OPENING BOSTON'S TAXICAB MARKET

by

John E. Kramer and William H. Mellor

In 1993, the Institute for Justice in Washington, DC., conducted a review of "Denver's Taxicab Monopoly". Following up on that endeavour, the Institute in 1995 conducted a review of "Boston's Taxicab Market". That review became an award winning proposal for the Boston Pioneer Institute's 1995 "Better Government Competition."

As an overview of the report, the IFJ has presumed that the majority of their readers understand the fundamental common law and economics associated with the taxicab industry. As that is not always the case, the report, while making some very valid observations, fails to draw their conclusions back to fundamental common law and basic economics. As a consequence, the report fails in its opening introduction as it states:

"The argument for taxicab deregulation rests on the principle that government should not protect for-profit taxi companies from competition to the detriment of the riding public as well as would-be entrepreneurs. Government's proper role is to ensure public safety with driver background checks, vehicle safety inspections, and inspections for insurance."

This is a true statement, and the IFJ is absolutely correct in their perception that a government should not protect for-profit taxi companies. However, how this situation ever emerged at all is not discussed anywhere in the report. This perception is not a secret, most regulatory authorities are very much aware of their obligation to focus their regulatory efforts for the benefit of the travelling public. But regulatory authorities today are caught up in a situation as their regulatory ancestors failed to perceive a fundamental law of economics - make something scarce and it immediately takes on a value if there is no simultaneous mechanism to prohibit that value.

The report fails to define that a licence [permit, medallion, or whatever it may be called locally] is nothing more than official permission to do something for a fixed period of time, at the end of which is full and automatic expiry with no imbedded right of continuance, no guarantee that the licence holder may acquire the same licence next period, no guarantee that the licence may be revoked for cause, and no guarantee that the regulatory environment might one day change.

The report properly recognizes that:

"Because the city restricts the number of medallions it issues at well below the market level, Boston taxi medallions sell at $95,000 on the open market."

But fails to challenge how it is that these licence change hands outside the regulatory environment for obscene amounts of money at all. Upon what legal authority can an intangible [a licence] be the focus of any kind of exchange of monies? Upon what legal authority do banks take back an intangible [a licence] as collateral on a loan to pay for that intangible? One would think that an organization such as the IFJ would at very least examine the relationship of a licence to common law.

Yet the IFJ does properly conclude that:

"... the City of Boston ... has created a black market that encourages businesses to obtain a piece of city property--the medallion--and sell it for an enormous profit, to their own (and no public) benefit."

The irony of this IFJ conclusion is that it is applicable to most every city throughout North America. It is not restricted to Boston. Regulatory authorities in most major North American cities face this dilemma. By historical inattention to fundamental economics, quotas were imposed or simply allowed to emerge, but with no simultaneous prohibition on licence transfers. As a direct result of immediate scarcity, licences began to take on real estate values of their own completely external to the regulatory environment.

As a consequence, regulatory authorities today are faced with a dilemma. Once licence prices were allowed to rise, the monies exchanged cannot be retrieved. It would be very inequitable to take remedial action that would have the effect of extinguishing an asset already paid for with the approval of the licence transfer. Over the passage of time, the continuation of the quota has artificially exploded licence values to positively obscene levels. One wonders under what legal authority a regulator can impose or even support any kind of a value for an intangible - permission to do something for a fixed period of time, at the end of which is full and complete expiry.

The dominant focus of the report is a strong recommendation for de-regulation of Boston's taxicab industry, and even offers up a suggested regulatory structure, something quite unique in such reports. However, the report fails to define just what is meant by de-regulation, and in that failure opens the door to misunderstanding and misconceptions, ultimately leading to the revolving door of regulation, de-regulation, and ultimate re-regulation.

The definition of de-regulation is a varied as there are people discussing just what it might mean. There is no definitive, widespread acceptance of just what is meant by de-regulation. It can range from a catastrophic absence of any form of regulatory action leading to utter chaos on the street, or to total oppressive imposition of a vast array of regulations largely composed of prohibitions unrelated to consumer service.

Rarely ever do regulatory authorities have the resources to adequately train and equip their staff and appointed decision makers. They are not driven by service to the public, they are driven by budgets and controls. While folks in the taxicab industry tend to be in it for the long haul as a legitimate for-profit business, far too many regulatory authorities are career civil servants passing through a period of time as a taxicab regulator, sometimes perceiving it through gritted teeth as mandatory time in purgatory.

All too often the regulatory authority is organized in a manner consistent to times past when most of the industry was organized along traditional corporate organizational lines. The taxicab companies owned the vehicles; maintained their vehicles; recruited, selected, employed, trained, supervised, and disciplined their drivers; and properly held the licences in their own names because they had due care and control over both the vehicle and the driver. The regulatory authorities range of communications extended largely to the array of strong business managers of each company.

Fundamental changes in tax laws provoked substantial changes in the environment such that the industry has become highly atomized. Where a regulatory authority had at one time a modest array of communications with industry folk, the birth of the independent contractor exploded this to a vast array of tiny, single vehicle companies, few with the training and business skills needed to run a company, even one that has become a "small business". Unfortunately, the regulatory authority's organizational structure has tended not to keep pace with this fundamental change in the environment. Many are now ill equipped to properly deal with the current situation. The extent to which this industry has become atomized poses serious regulatory challenges.

The IFJ report goes on to note:

"... most Boston taxi drivers .... must pay exorbitant weekly fees for the "privilege" of driving for someone else who owns the taxi medallion."

The IFJ took a fine opportunity to focus attention on a fundamental flaw in current regulatory practices, largely emerging out of changes in the tax laws in the early 70's. Back in the good old days, licences were properly issued to companies having due care and control over both the vehicles and the drivers. Times changed, but all too often, licences are still being issued to the same companies who now impose extraordinary efforts to ensure with absolute legal clarity that they have no control over the driver or what he does with the vehicle.

So today we have a situation whereby a licence is being issued to someone who no longer has care and control of the vehicle or the driver, but he who does have care and control of the vehicle [the driver] does not have a licence to operate a public vehicle for hire. He may hold a licence to drive a taxicab, but he does not hold the licence to operate a public vehicle for-hire. One wonders how the insurance companies view this anomaly.

The IFJ makes a good recommendation that:

"To improve poor taxi service and offer opportunities to would-be entrepreneurs, we suggest .... open entry into the taxi industry and regulate cabs to protect public safety by requiring a license, a background check on drivers, a safe vehicle, and adequate liability insurance...."

This recommendation has merit and is sound, but is not in itself enough. There is I believe a presumption here of migrating perilously close to true de-regulation, risking utter chaos on the streets. Total de-regulation is a myth.

Historically, regulations have largely focused on prohibitions, where public service benefits simply do not emerge. The focus has been on regulatory compliance rather than voluntary, enthusiastic customer service. If open entry is to succeed, then that open entry must be subject to performance standards substantially more definitive than just a "safe vehicle", embracing all aspects of the service - vehicle standards, service standards, dispatch standards, dress, deportment, training, marketing, etc.

Such a regime may be called "open entry", but in fact, such standards simply impose a different form of entry control. Anyone can acquire a licence and get into this business, "so long as the standards are met". However, the significant difference here is that the travelling public has a much better chance of enjoying high quality service, rather than licence holders speculating on licence values outside the regulatory environment.

I am disturbed that the IFJ perceives:

"... cabs are not essential services like water and electricity."

I disagree strongly with this perception, for taxi service is indeed an important element within urban transportation infrastructure. Taxicabs provide a personalized transportation service that simply cannot be provided by any other means. I sincerely believe that taxi drivers are the unsung heroes of personalized transportation. Taxicabs do provide an essential service, and notwithstanding serious problems plaguing this industry during these difficult times, this industry must receive adequate attention and support from the regulatory authorities.

I note with some satisfaction that the IFJ has included some wise provisions in their model legislation:

" No person shall transport or offer to transport a passenger for a fare in any public vehicle for hire without a license to operate a public vehicle for hire."

"To be eligible for licensure as a public vehicle for hire, a motor vehicle must ... be owned by an applicant eligible to apply for a public vehicle for hire license."

"To be eligible to apply for a public vehicle for hire license, a person... must be the owner of that vehicle [and] must have a central office located in the City of Boston..."

Hopefully these provisions would minimize anomalies of the present system where the person holding the licence all too often does not have care and control of the vehicle, and the person who does have care and control of the vehicle does not hold the licence. In some extreme situations, the licence is held by one person but does not own a vehicle, while someone else owns the vehicle, and the driver leases both a licence and a vehicle from 2 different people, for exorbitant fees totally unrelated to the quality of public service.

The IFJ is to be commended for drawing much needed attention to some very sensitive issues. It could have made a much stronger case for a form of de-regulation for Boston's Taxi Market, but on balance this is a good report that not only provides a rudimentary roadmap for recovery, but should also be widely distributed to both the regulators and the industry. These are some extremely important issues that grow ever more sensitive with the continued passage of silence.



Copies of the Institute For Justice Report :

OPENING BOSTON'S TAXICAB MARKET

by John E. Kramer and William H. Mellor

may be obtained from:

Institute for Justice
1717 Pennsylvania Avenue, N.W.
Suite 200
Washington, D.C. 20006
Phone: (202) 955-1300
Fax: (202) 955-1329
E-Mail: instituteforjustice.org

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