How Cities Put the Brakes on Taxicabs

Sam Staley is vice president for research at Buckeye Institute for Public Policy Solutions in Dayton, Ohio, directs the Urban Futures Program for the Los Angeles-based Reason Public Policy Institute, and has more than ten years of experience in local government consulting.

The lifeblood of any economy is its people. Human progress ultimately springs from the inspiration of people who transform their ideas into goods and services that others can use every day.

That is why entrepreneurship is critical to the success and growth of a community and economy. Not surprisingly, economic growth is driven by the expansion of small businesses.^[1] Entrepreneurs invest in new ventures on a hunch that they are tapping into some unmet demand.^[2] Guided by expectations of profits, entrepreneurs experiment with and test new ideas. If they hit the mark, their fledgling businesses grow and prosper.

This lesson is important for cities. Prosperous cities are havens for trade and investment. The earliest cities were markets for agricultural goods. Cities facilitated economic expansion by providing a mechanism for developing new markets beyond the closed, narrow market of the village or the nearby farmers.^[3] Historically, the rise of great civilizations has been predicated on trade. Some cultures, such as the ancient Phoenicians, depended on trade for their livelihood. The rise of Amsterdam and the great cities of Italy was credited in large part to their position as centers for trade and commerce.^[4]

Oftentimes, though, in the latter stages of a city’s development, the entrepreneurial energy that transforms green fields and villages into thriving urban centers is taken for granted. Bureaucracies and special interests encroach on small businesses and residents, sapping the creative energy from local entrepreneurs and pushing their investments and growth toward more hospitable environments. In the late twentieth century, suburban and rural areas have provided the economic climate best suited to small business development. As a result, more than two-thirds of all new jobs in the 1980s and 1990s have emerged in the suburbs.^[5]

Taxicabs and Entrepreneurship

The extent to which cities erect obstacles to entrepreneurship can be quite numbing. Take, for example, the case of taxicabs.

Taxicabs are, potentially, one of the purest forms of entrepreneurship. The business can be established with a car, a driver, and someone with the savvy and gumption to recognize an unfulfilled need in the market.

Sitting in her apartment, Lisa, an aspiring college student, mulls over ways to pay her tuition at the local university. She visits some of the local grilles and sees an unmet need: a part-time cab service that works with local restaurants to transport customers home during evening and weekend hours. She could earn money at those times, and spend the day studying and attending classes.

So our young entrepreneur simply uses her own car, ensures it is in safe working order, buys insurance (another $3,000 for cabbies), builds a client base, and she’s off. Right?

Not quite. Local regulations have made the realities of starting up a taxicab business far more complicated and costly. These regulations add tens of thousands of dollars to the normal start-up costs of new companies.

Licensing and Limitations

First, Lisa needs a license to operate the cab. Or, more accurately, she needs licenses for her budding enterprise. In other words, before she can begin her company, local government officials need to approve and register her business.

At least three licenses are often required in the taxi business: one for the driver, one for the car, and another for the company. While driver’s licenses may range from just $8 to more than $50, fees for cars and companies often range from $25 to $250 per car. In some cities, Lisa may be faced with almost $600 in licensing fees just to put one car on the road.

This, of course, presumes that Lisa is allowed to establish her company. Many cities simply prohibit new cab companies from starting up. Some, such as Columbus, Ohio, and New York City, have moratoria on issuing new taxicab licenses. This has created a lucrative black market for existing licenses, ranging from $5,000 in Columbus to more than $60,000 in New York City. So if Lisa were starting up in Columbus, she would pay more than the official cost of $75.

Even when there is no moratorium on new cabs, cities commonly require proof that the taxi company is needed. Some cities require public hearings every time someone wants to start a new company or add a car to the fleet. Presumably, this is to ensure the market is not flooded with fly-by-night companies. But the process makes it almost impossible for new companies to begin legally. This requirement is particularly onerous for small companies. Often, they are established on an entrepreneurial hunch, not on the basis of sophisticated market analysis.

In Denver, for example, start-up entrepreneurs had to prove their company would serve an underserved market and show that the existing companies were incapable of providing the service. That is an almost impossible standard since entrepreneurs respond to market opportunities, not to whether existing companies have the capacity (or inclination) to provide the product. This requirement alone was largely responsible for keeping new cab companies out of the Denver market from 1947 to 1995.^[6] Local regulations that presume that new companies do not serve the public interest have become one of the greatest obstacles to entrepreneurial development in the taxicab industry.

Multiple Regulations Discourage Entrepreneurs

In a comprehensive analysis of taxicab ordinances in eight Ohio cities, the Buckeye Institute found that cities tailor their regulatory system in unique ways, each with a decidedly anti-entrepreneurial effect.

• Toledo imposes a cap on the number of cabs and prohibits advertising. It requires a public hearing for each new license and cab company, proof that new companies would serve the “public interest,” and financial reports from the companies. The city also sets taxi fares by ordinance.
• Cleveland also has a cap on taxicabs. It refuses to license additional cabs older than three years, prohibits companies with fewer than 25 cars from operating, and requires a separate dispatching office and two-way radios in every cab. (Cell phones are not good enough.)
• Dayton keeps entrepreneurs at bay by requiring companies to have separate dispatching and business offices and prohibiting part-time operators. Consequently, any new start-up company will need enough cars and personnel to cover 24-hour shifts, seven days a week. The company will also have to hire full-time office staff to dispatch calls even when modern technology would allow car dispatching through cell phones.

The sum total of these regulations can be substantial. The Buckeye Institute estimated that the regulatory burden of local regulations on a newly established taxicab company amounted to almost $67,000. This estimate excluded the initial costs of a car and insurance.

Importantly, licensing fees were a relatively small portion of the total regulatory burden of local ordinances, less than one percent in Dayton, for example. The bulk of the burden resulted from nonfinancial regulations, which require companies to provide service during specific hours and in specific locations. More than three-quarters of the regulatory burden in Dayton resulted from those requirements.

Public Interest Not Served

The regulations do not serve the public interest. An examination of taxicab fares in eight Ohio cities found that cities that allowed the market to determine rates had generally lower fares:

Taxicab Fares for 1-mile Trip in 8 Large Ohio Cities

Market-determined rates       $2.59

City-set maximum rates             $2.85

Rates set by ordinance             $3.10

Source: Taxicab Regulations in Ohio’s Largest Cities (Dayton, Ohio: The Buckeye Institute for Public Policy Solutions, October 1996), p. 19.

Moreover, research on cities that have deregulated their cab industries found that, on average, the number of cabs increased by 23 percent.^[7] Within the first three months of deregulation in Indianapolis, 32 companies started up, three-quarters of which were owned by minorities and women.^[8] Cincinnati experienced a 49 percent increase in the number of licenses issued in the wake of its deregulation.^[9] (The deregulation consisted of removing many of the onerous criteria on which approval of licenses had been based.) This suggests a substantial opportunity to serve consumers in those cities.

Protecting Existing Companies

Clearly, taxicab regulations have purposes other than raising money. If that were their sole purpose, licenses and fees would be much higher. As noted, licenses on the black market often cost substantially more than the official price set by the local government.

The real effect of the laws is to shut out entrepreneurs, limit competition, and protect existing companies. Indeed, one of the principal arguments against deregulating local taxicab markets is that revenues for existing drivers and companies will fall.^[10]

That limiting competition is the chief objective is also evident by looking at the nature of the regulations imposed on taxicab companies. Regulations rarely focus on outcomes or performance. They almost always focus on the inputs or characteristics of the industry irrespective of health and safety considerations. In fact, few ordinances provide any mechanism for addressing service-quality concerns once a license has been issued. Prohibitions on part-time cab operations, which make starting up new companies very difficult, may be justified in the name of protecting consumers. Yet, full-time companies may also poorly serve customers, particularly when they are protected from competition. It is revealing that ordinances rarely provide ways to restructure or close unsound companies. Of course, as with all other private business activity, the market provides swift discipline for the wayward company.

Unfettered markets are effective at regulating businesses through the profit-and-loss system. But regulations that hamper entrepreneurship and competition compromise the market’s ability to discipline poorly performing companies. They also limit the economic potential for cities, since new companies cannot form and expand.

Limits to Growth

When cities erect insurmountable barriers to entrepreneurship, the consequences for economic growth are significant. If entrepreneurs cannot get their ideas past the regulators, they certainly will not be able to build and expand companies. The city’s long-term economic health is jeopardized. Regulations, such as taxicab ordinances, that limit entry and competition inevitably stifle the entrepreneurship and market innovation necessary to build neighborhoods, particularly in older cities. Until city administrations recognize the perverse effects of local regulation, the prospects for encouraging revitalization and sustained growth are limited. []

Notes

1. David Birch, Job Creation in America (New York: Free Press, 1987).
2. See Israel Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973).
3. An excellent examination of this role for cities can be found in Jane Jacobs, The Economy of Cities (New York: Random House, 1969).
4. Joel Kotkin, Back to the Renaissance? (Malibu: Calif.: Pepperdine University/Pacific Research Institute for Public Policy, 1997).
5. An excellent summary of these trends can be found in ibid. See also Joel Garreau, Edge City: Life on the New Frontier (New York: Doubleday, 1991).
6. In 1995, under pressure from entrepreneurs and litigation by the Institute for Justice, a Washington, D.C.-based public-interest law firm, Denver deregulated its cab industry. See Dwight Filley, “Taken for a Ride: How the Taxi Cartel and the State are Disserving Denver’s Economy,” Issue Paper #6-93 (Golden, Colo.: Independence Institute, April 1993), and “Challenging Denver’s Taxicab Monopoly,” Litigation Backgrounder, Institute for Justice, Washington, D.C., n.d., n.p.
7. Price Waterhouse, Analysis of Taxicab Deregulation and Regulation (Kensington, Md.: International Taxicab Foundation, 1993), p. 11. This report, however, is generally critical of deregulation.
8. Ordinance 76 Update, Regulated Competition in the Indianapolis Ground Transportation Marketplace, Economic Development Committee, January 19, 1995. This ordinance deregulated the Indianapolis cab industry.
9. “Taxicab Regulation in Ohio’s Largest Cities” (Dayton, Ohio: The Buckeye Institute for Public Policy Solutions, October 1996), p. 26.
10. Roger F. Teal, “Taxicab Regulatory Change in San Diego,” Taxicab Management, Fall 1986, p. 32.