August 24, 2016 1:14PM

Massachusetts to Impose Tax on Ride‐​Hailing Companies to Subsidize Their Traditional Taxi Competitors

By Charles Hughes

Republican Governor Charlie Baker recently signed statewide regulations for ride-hailing platforms like Lyft and Uber and this package has the ignominy of including “a subsidy that appears to be the first of its kind in the United States,” as Reuters calls it. This comes in the form of a new 5-cent per trip tax on ride-haling companies that will be funneled to the traditional taxi company. This is part of the total 20-cent per trip fee with the rest of the revenues being split between local governments and the state transportation fund.

There are approximately 2.5 million rides per month in Massachusetts just through Uber and Lyft, with more coming through other, smaller ride-hailing companies.  This means that the 5-cent tax and subsidy will transfer at least $1.5 million to traditional taxi companies each year, and likely much more as the total number of ride-hailing trips continues to rise in the coming years.

As it is written now the “taxi tax,” as Brittany Hunter has dubbed it, is scheduled to be collected through 2021 and the entire 20 cent surcharge will be in effect through 2026. Now that traditional taxi competitors have gotten a taste of being subsidized by their more successful competitors, it seems unlikely they would let a fruitful source of new ‘revenue’ expire without a fight.

While the regulation promises “riders and drivers will not see the fee because the law bars companies from charging them” there is no way the ride-hailing companies will passively absorb all of these additional costs. Instead, the most likely scenario is that they will indeed find a way pass on these costs and the most likely channels are higher prices for consumers or lower compensation for drivers.

Some details about how the new slush fund will be spent are still in the works, and MassDevelopment, the “economic development and finance agency” well-versed in disbursing subsidies to business will be in charge of how those funds are allocated. The law directs the money to help traditional taxies adopt “new technologies and advanced service, safety and operational capabilities” while the manager of Boston area's Independent Taxi Operator's Association has suggested it could go towards improving a smartphone app they have begun to use. So most of the ideas for the use of this new subsidy from the new  ride-hailing companies is to try to make traditional taxi companies adopt some of their practices. Adopting some of the innovative practices that have enabled ride-hailing companies to become successful might be something that traditional taxis should explore, but why is it something their competitors have to subsidize?

Efforts like this to force new entrants to subsidize the entrenched incumbents they directly compete with are misguided and counterproductive. They encourage both groups to focus their efforts on trying to influence regulation instead of innovating or improving their products.

Instead, the main way the traditional taxi companies in Massachusetts are innovating is trying to find new ways to make their new competitors subsidize them.

If only the last known VHS manufacturer had held out for just a little longer, they could have lobbied for a surcharge on streaming services like Netflix and Hulu that would subsidize their operations.

Instead of looking to impose the old framework of regulations on these new business models or force new companies to subsidize their traditional competitors, policymakers could look to reform those burdensome regulations that impose costs on consumers and drivers alike.