Wednesday, July 11, 2012

The indefensible public policy of shielding big taxi companies from competition

by Daniel Horwitz

Daniel Horwitz
The 149-page final report on “Taxicab and Other Passenger Vehicles for Hire in Nashville” released by the Mayor’s office yesterday has several important implications for the future of Nashville’s transportation industry, only a few of which have been picked up by local news outlets.   

Though I was among the first to question the value of Metro’s $172,810 expenditure on this study, let me also be the first to say that the fact-finding done by RPM Transportation Consultants appears to be exceptional, and that this alone may have been worth the price of admission.  Now that the underlying facts of the industry are no longer in dispute, we can finally shift the conversation to the indefensible public policy components of the current transportation licensing system, and can hold Metro legislators accountable if and when they refuse to reform it. 

The consultants’ final report includes a great many findings about both the taxi industry and the livery industry in Nashville, which I will address in turn.  With respect to the market for taxi services, the most important facts are as follows:

1)   The Transportation Licensing Commission has currently capped the number of taxi permits allowed in Nashville at 585, all of which are owned by one of five private taxi companies.

2)    In order to be able to drive a cab in Nashville, all taxi drivers must pay one of these private taxi companies a weekly fee (known as a “lick”) which ranges from $150/week to $205/week.

3)   Taxi drivers independently own or lease every single cab in Nashville.

4)   Taxi drivers themselves bear all the costs of insurance, gasoline, vehicle maintenance, and credit card processing, and also pay out of pocket for the FBI background check, driver training class, driving test, physical, and eye exam annually required by Metro.

5)    Each of Nashville’s five private taxi companies has designated its drivers as “independent contractors,” meaning that these companies do not have to provide employee benefits like health insurance or workers’ compensation, and also do not have to comply with minimum wage requirements. 

If this doesn't immediately strike you as outrageous, allow me to explain why, as both a consumer of taxi services and someone who cares very deeply about fair working conditions, Nashville’s current taxi licensing system has my blood boiling.  Take, for example, the business model of Taxi USA— Nashville’s largest cab company and the lucky owner of 205 of Nashville’s 585 taxi permits (over 35%).  “Developed in 2006 by two well known taxi industry owners and investors,” according to the consultants’ report, Taxi USA makes money by subleasing each of its 205 taxi permits to individual cab drivers at a rate of $205 per week.  Since most drivers work about 50 weeks each year, Taxi USA’s annual revenues amount to somewhere around $2.1 million annually. 

What operating expenses does Taxi USA have to offset these revenues?  Well, the company doesn't have to purchase any taxis— those are all owned or leased by the drivers themselves.  It also doesn't have to pay for insurance, gasoline, vehicle maintenance, or any other driving-related expenditures— cabbies bear those costs in full as well.  Additionally, rather than having to meet payroll and pay its employees a salary like a normal business, Taxi USA actually gets to charge its employees for the privilege of being able to work (which has got to be the most unbelievable legal scam I’ve ever heard of).  

 Finally, by designating its employees as mere “independent contractors,” Taxi USA’s owners also get to take advantage of a legal loophole that allows them to avoid having to provide employee benefits, and can fire workers who attempt to unionize.  With a system like this, it’s really no wonder that the secret shoppers commissioned by the Metro consultants found that “[n]o company was exempt from poor service.”  Taxi drivers in Nashville are affiliated with their parent companies only on paper, and as such, they have absolutely no incentive to care about the name painted on the side of their cabs.  Notably, unless Volunteer Taxi (Nashville’s first driver-owned and driver-operated taxi company) is granted the 61 permits it has requested on July 26th, the poor quality of taxi service in Nashville is unlikely to change anytime soon.

How exactly do Taxi USA and the other four taxi companies in Nashville get away with a scheme that allows them to generate millions in revenue with almost no operating expenses?  The short answer is that all of Nashville’s 585 taxi permits are owned by one of these five taxi companies, and the TLC has completely shielded these companies from competition by refusing to lift the artificial permit cap.  In terms of actual transportation services, though, 100% of the benefits to the Nashville community are provided by the “independently contracting” drivers themselves— not the “taxi” companies (which actually describe themselves as “franchising” companies anyway). 

Notwithstanding the fact that Michael Solomon, executive Vice President of Taxi USA, has publicly whined that running a taxi franchising company in Nashville is “a challenge” and that “everybody thinks it’s easy,” best I can tell, the job of taxi company management is merely to show up to work once a week, collect money from the drivers, and go home. 

In sum, by artificially restricting the number of taxi permits allowed in Nashville and thereby preventing anyone else from being able to compete, the Transportation Licensing Commission has created five outrageously profitable but completely unnecessary middle men who provide no goods or services whatsoever to the people of Nashville.  (For anyone who cares, this nonsensical system is quite similar to the former version of our Federal student loan program, interestingly enough.) 

Practically speaking, Nashville’s cab drivers are currently paying the equivalent of a $10,000 annual tax for the mere privilege of being able to drive a cab in this city, yet instead of going into Metro’s general fund, this tax is both levied and collected by the owners of the city’s private taxi companies.  Strange as it seems, this is precisely why the Metro consultants found that so many cab drivers actually oppose a fare increase (despite making only about $2.40 per hour after expenses, according to a 2008 preliminary report to the TLC).  If fare prices were to go up, the drivers complained, companies like Taxi USA would simply raise the weekly “lick” (tax) they have to pay, and the drivers themselves wouldn’t see so much as an extra dime.   

The solution to this problem is simple.  Similar to Tennessee’s “shall issue” system for everything from bartender certification licenses to attorneys’ licenses to gun carry permits, anyone who takes the necessary classes and meets Metro’s stated requirements for being able to drive a taxi should be given a taxi permit.  More specifically, anyone who wants to drive a cab in Nashville should be permitted to do so provided that he or she: 1) passes the aforementioned FBI background check, driver training class, driving test, physical, and eye exam required by Metro; and 2) complies with Metro’s maximum fare price and quality control ordinances.   

The notion that the Transportation Licensing Commission can use its power to protect Nashville’s existing taxi oligopoly (cartel) by continually refusing to grant permits to would-be competitors like Volunteer Taxi is absurd, and quite frankly, the Tennessee Supreme Court held that this kind of behavior “clearly violates Article I, Section 8 of the Constitution of Tennessee” all the way back in 1956.  Personally, I don’t blame the Mayor’s Office for this mess at all; to the contrary, in fact, Mayor Dean has gone out of his way to understand the awful working conditions faced by Nashville’s taxi drivers, even though the TLC makes up less than .2% of the overall Metro budget.  But if your Metro Councilman is among those local legislators who oppose free market competition in the taxi industry, you really need to consider voting that person out of office in the next election.

With respect to the livery industry, the consultants’ findings were shorter but no less dire.  (For those who are unfamiliar with either the content or the lobbyist-motivated origin of the Metro livery regulations enacted last year— which require, among other things, that limo companies charge their customers more and wait longer to pick them up— a complete summary can be found here.)  Most importantly, the consultants concluded both that: (1) “there is considerable interest in being able to offer a lower cost sedan service at $25.00, if it is legal,” and (2) “the structure for regulating [sedan] service is reasonable, as is the $45 minimum fare which provides a sufficient ‘differentiator’ between taxi service and [sedan] service.” 

Even for those who are completely unfamiliar with the state of the livery industry in Nashville, there is no need to detail what makes this latter conclusion so stupid.  If there is consumer demand for a service, Metro’s role is not to make the provision of that service illegal.  If I want to take a limo ride for $25, and if the limo company wants to charge me $25 for that ride instead of $45, there isn’t a reason in the world why we should be legally prohibited from entering into that transaction.   

Metro also has no business whatsoever favoring the taxi industry over the livery industry, and given the blind eye that the Metro government has repeatedly turned to the plight of Nashville’s taxi drivers, the notion that these regulations were actually intended to protect taxi drivers is highly disingenuous at best.  At the very least, the attorneys over at the Institute for Justice (who have sued the TLC for “impos[ing] a host of arbitrary and irrational regulations on limousine and sedan services in an unconstitutional effort to eliminate competition in the transportation market and benefit a small group of industry insiders”) can be grateful that Metro’s consultants agreed that the purpose of the recent livery regulations was pure and unfettered economic protectionism, and that these regulations had nothing at all to do with public safety.  And just like the broken taxi licensing system, this mandatory price-fixing scheme similarly justifies voting out your Metro Councilman if he or she refuses to repeal it.  Price-fixing is not the government’s role, and legislators should be punished for sacrificing basic principles like this in order to appease the influential Tennessee livery lobby TennLA.

A former Professor of mine once observed that powerful business interests often follow the strategy “if you can’t beat the competition, make the competition illegal.”  That observation could not be any more true than it is here in Nashville’s transportation market, where entrenched local interests have, to this point, successfully fought tooth and nail to prevent free and fair market competition in the taxi and livery industries.  Without question, the only beneficiaries of the policies that have recently been promulgated by the TLC are the owners of Nashville’s pre-existing cab companies and Nashville’s most expensive limousine companies, whose interests have been steadfastly protected by the Metro government at the expense of both consumers and workers alike.  For obvious reasons, this is completely unacceptable. 

Taxi and limo drivers themselves, many of whom are refugees who proudly accepted American citizenship after arriving here, often lament that they are being denied a fair shot at achieving the American dream.  They are correct.  The right to work and to be free from economic protectionism can be seen as early as the 41st provision of  The Magna Carta of 1215, it was famously reinforced under English law in the landmark “Case of Monopolies” Darcy v .Allen in 1599, and the “sacred right of labor” implicit in the U.S. Constitution itself was referenced by members of our Supreme Court as early as 1872.  

 Whether people who want to earn an honest living should be prohibited from working through intentionally burdensome local regulations is not, and never will be, a partisan issue.  (And just for the record, I’m a Democrat.)  No matter what your political affiliation, we can all agree that these atrocious policies need to end.  If they aren’t repealed soon, the legislators who are responsible for maintaining them need to be replaced.  It’s that simple. 

Daniel Horwitz is a third year law student at Vanderbilt University Law School, where he is the Vice President of Law Students for Social Justice.  He can be contacted at

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