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Taxi Industry Getting Ripe for Radical Reform


Taxi Industry Getting Ripe for Radical Reform

April 22, 2002
Urban PolicyNYCOther

Recently New York’s new mayor got a lesson in the strange politics and even stranger economics of the city’s taxi industry when cabdrivers panned his proposal to raise taxi fares. The drivers knew what Mayor Bloomberg probably has yet to figure out: The city’s taxi system is so fundamentally flawed that Mr. Bloomberg needs to junk it and create something new.

In the mid-1920s, New York. licensed as many as 21,000 cabdrivers, and those who did the actual driving held the permits. But during the Depression, many drivers simply let their licenses lapse, so that by 1937 only about 12,000 were active. That year, under pressure from drivers, the city passed a law limiting medallions, a limit that eventually settled at 11,787. It granted current medallion holders their licenses permanently, and it permitted them to sell the medallions. Later, the city allowed individuals to accumulate more than one medallion and to lease them to others.

As is often the case when government restricts competition, the new system sparked a sharp rise in the price of medallions as the city’s economy recovered from the Depression and grew. A medallion that originally sold for only $10 most recently changed hands for about $200,000. Moreover, buying and selling these licenses has become an industry unto itself, encompassing medallion brokers, taxi consultants, and- specialized lenders. The fares that New York riders pay have supported this entire industry for years, in addition to providing the medallion owners with a return on investment high enough to justify a $200,000 medallion price. In other words, taxi fares in New York are not too low; they are unnecessarily high.

In years past, medallion holders owned fleets of cabs and hired drivers to operate them at a salary, even providing drivers with health insurance. But around 1979, drivers began instead paying medallion holders a fee to use the cab for a 12-hour shift. As a flood of new immigrants created a limitless supply of prospective drivers willing to work for very low pay, around $10 an hour, lease fees rose to some $100 a day or $30,000 a year—increasing the return on medallions and raising their price. The industry’s stable, lower-middle-class force of drivers gave way to a class of inexperienced cabbies, among whom turnover was high. This new class of drivers didn’t know the city well, spoke limited English, and often drove dangerously.

The system became an even worse deal for these low-wage drivers after the attacks of September 11 deepened the recession that was already under way, keeping tourists and business travelers out of the city and depressing taxi ridership for the first time in years. Drivers could no longer earn a living, some days actually losing money, when fares didn’t cover the $100 lease fee and the additional $20 cost of gas. Many stopped showing up for work, and cabs sat idle in their garages. In response, medallion owners began pressing for a fare increase, which they claimed would bring the drivers back, and in February Mayor Bloomberg announced his support for a hike, although later his administration said the matter needed more study. But drivers themselves balked at the idea of a rate hike. In the past, they pointed out, owners have simply raised leasing rates every time the city increased fares—claiming most of the fare increases for themselves. Raising prices to make up for falling demand makes zero economic sense, they might have added, since the fare hike will only cut demand further.

Although this system is transparently bad, the powerful medallion owners, especially the 20-odd owners of big fleets, and the brokers and lenders who support the industry are among the biggest political givers in mayoral and City Council races and so have thwarted past reform efforts. The difficulty is compounded because government cannot simply expropriate the current medallions from owners who have paid up to $275,000 to purchase them.

But there is a solution that would not involve expropriation and would dramatically lower the cost of operating in the taxi business. At the heart of a new system would be a new set of licenses, which would replace medallions and be renewed every year. When drivers gave them up, the licenses would revert back to the city instead of being sold in the aftermarket at exorbitant prices. They would not constitute property.

To institute this new system, the city would have to buy back all its current medallions, at least at the price that medallion owners paid for them. Such a buyback would cost at least hundreds of millions of dollars, but the city could raise the needed funds without taxing the municipal treasury by using the fees that the new licensing system would generate. Under the new system, New York would charge taxi drivers a significant licensing fee, between $5,000 and $10,000 a year. While the price seems steep, it is much less than the $30,000 or so a year that drivers must currently pay in leasing fees to medallion owners. The city would also raise the number of taxi licenses, awarded by lottery to qualified applicants, to about 25,000, to account for the fact that corporate medallions currently are leased to two shifts of drivers a day. This licensing system would raise between $125 million and $250 million a year. Then the city would float a bond offering backed by these dedicated licensing revenues to finance the buyback of medallions. Eventually, when the city paid off the bonds, the money from the licensing fees would accrue to the city, which currently gets no annual benefit from its taxi licenses. By eliminating the medallion holders’ $750 million cut of the $1.3 billion in fares collected annually, the city would not need to raise fares again for at least a decade.

Medallion owners would fight this reform fiercely, but what makes this moment a unique opportunity for change is that term limits have brought into the City Council a host of new members who are not traditional supporters of the taxi owners and owe them little. At the same time, billionaire Mayor Bloomberg, who financed his own election bid, owes nothing to the medallion owners.

Ending the old system should prove a boon to everyone except medallion owners and the hangers-on who support themselves off this government-created market. Taxi drivers will face a much smaller financial burden, allowing them a decent living at current fares. More stability among drivers will mean more knowledgeable and safer cabbie corps. At the same time, the city will be able to demand more of these drivers in the way of safer, more comfortable cabs, fuller insurance coverage, and more driver training. Right now, because of their razor-thin or nonexistent profits, drivers understandably meet every call for new safety measures or other regulation with cries of harassment. The taxi industry is one of the few businesses where regulation makes some sense. But the regulation must benefit the public—not, as it does today, the medallion owners.