Trouble In Taxi Town

The Metropolitan Transit Authority (MTA) is the San Francisco city department that handles parking and transportation. It’s all municipal stuff – buses, light rail, parking enforcement, with one curious private sector exception – taxis.

Take a look at this screen grab from its website:

SFMTA website, 7/31/2021

A “taxi town”?

What?!

But the city’s relationship with taxis goes much deeper. Taxis enjoy benefits their competitors, such as Uber and Lyft, can’t partake in, like dedicated stands, special airport access and, most importantly, exclusive lanes on streets shared only with buses.

You can’t use this lane. Neither can your Uber driver. But taxis can.

In fact, city money – your tax dollars – seem to be single-handedly keeping the taxi industry afloat. The MTA’s 2020 operating budget spends $39,300,000 on them.

And city leaders clearly favor taxis over competitors. Consider this article, written by Supervisor Matt Haney, attacking Uber and Lyft for hiring drivers as independent contractors. Notice that taxis aren’t mentioned, despite many having been ICs for decades. Or this one by Mayor London Breed, defending taxis and suggesting competitors face higher taxes.

It gets weirder. Luxor Cab has been hailed (no pun intended) a “legacy business“, meaning it gets 500 of your tax dollars per year for every person it employs, just for being awesome.

I can think of better uses for my tax dollars.

Despite all the favoritism, taxi industry in SF is a big, corrupt mess, thanks to both its own practices, and those of the city. Let’s take a look at what’s broken, and how to fix it.

A new way to get around town changes everything

Call it the Revolution of ’09. A few years into the new century, a better type of shared transport swept into San Francisco, seemingly overnight. Instead of waiting for Muni, residents now could cheaply be driven in private vehicles wherever they wanted to go. And they could summon these cars with their finger. The public loved it.

I’m talking, of course, about the taxi revolution of 1909. That was the year taxis arrived in SF and exploded in popularity. Here’s how Fay Beal, an early taxi entrepreneur, described them:

There are no longer any such things as lost trains and lateness at appointments. There are taxicabs everywhere, and the raising of a finger brings one of them to one’s side. Their charges are so reasonable that they can be used by almost anyone…

SF Chronicle, April 4, 1909

As much as people loved this new means of transport, problems quickly arose. Cabbies drove like mad men, and the papers contained almost daily stories of accidents. An especially fun one, from the Oct 1, 1909 Chron:

Best. Headline. Ever.

Beyond erratic driving, cabbies were a rough and tumble lot, and were accused of overcharging customers and other shady activities. So, in the same year they arrived in SF, city leaders began regulating them.

Before we go on, you should know that cities, as a rule, are really bad at regulating taxis. For example, this white paper analyzing America’s largest taxi markets found that:

All 44 cities studied regulate taxis tightly, adopting five of 10 major regulatory provisions on average, but the specific regulations they use vary widely. This suggests cities are making taxi policy absent a common understanding of what regulatory provisions, if any, are necessary to protect consumers.

Regulatory Overdrive – Taxi Regulations, Market Concentration and Service Availability, 2018

SF’s attempt at regulation was even messier, because it mixed laws to protect riders with labor demands (like setting taxi meter rates and maximum hours worked) and traffic law enforcement generally, which hadn’t been addressed before taxis came along.

Around 1930 SF began issuing a fixed number of taxi permits, or “medallions”, which allowed a taxi to operate. Medallions were issued to taxi companies, and could be bought and sold. These medallions are at the center of today’s tale.

Regulation didn’t do much to clean up the taxi trade. An example from this excellent page on local history:

Between 1934 and 1936, the [taxi] drivers’ union underwent a period of internal strife marked by beatings, shootings and the burning of vehicles.

What regulation – allowing the government to largely determine the revenues and profits of the industry – did do was invite corruption. For much of the 20th century, a single company, Yellow Cab had a virtual taxi monopoly. It purchased and hoarded medallions to limit competition, and kept city leaders in its glove box:

Yellow dominated the local taxi business for the last 44 years, not only by providing the most taxi service, but by continued munificence to public officials: Campaign donations, Christmas gifts of taxi scrip and other favors.

SF Examiner, Dec 7, 1976

And Yellow got some sweet perks for its troubles. It had a monopoly on airport access, and many prime taxi stands in the city were Yellow-only. The result:

San Francisco taxi rates are already the highest in the world. And with taxi permits sharply limited in number, cab licenses here are worth $20,000 and upward. But only – be it added – so long as Big Yellow clings to it 503 transferable permits and does not bottom the market by dumping same.

Dick Nolan, SF Examiner, Feb 7, 1972

Until 1976, everything was humming along in true SF style – “Big Yellow” made a lot of money, politicians got their share, and citizens were left holding the bag. Then the system hit a speed bump – Yellow Cab turned out to be run by criminals. When it was abruptly shut down, the city found itself with a serious taxi shortage. The result was 1978’s Prop K, which began allocating non-transferrable medallions directly to drivers, not taxi firms.

Today, the industry is still prone to fraud. Hop in a cab at Fisherman’s Wharf, ask to be taken to your hotel, and risk a circuitous tour of the city. And while there are plenty of honest drivers, many aren’t the kind of folks you’d take home to mom.

Spend some time scrutinizing San Francisco’s taxi trade, where thousands of drivers toiling for 34 companies compete for cash, and you’ll find a business where laws are routinely flouted and dubious behavior abounds.

SF Weekly, 2/14/07

So, arguably, the industry continues to require some type of regulation. And by 2006, SF had plenty of that:

Regulating the San Francisco taxi industry currently involves no fewer than 11 separate city departments, and further subdivision within department divisions for a total of 17 total entities.

5/6/06 SFMTA report

It’s good to be a taxi.

Some of this regulation was good (checking meters for fairness), and some probably bad (setting prices and limiting the number of drivers). This is as true today as it was in 1984, when the Federal Trade Commission reported:

The taxicab industry is heavily regulated, mainly by local governments. Entry, fares, services, and quality are restricted in a substantial majority of large urban areas…

The principal conclusion of this report is that no persuasive economic rationale is available for some of the most important regulations. Restrictions on the total number of firms and vehicles and on minimum fares waste resources and impose a disproportionate burden on low income people.

With the city constricting the supply of taxis, the wait for new medallions was in the decades. This created a chronic shortage of drivers, which is just how the existing ones liked it. As long-time Bay Area journalist C.W. Nevius put it in 2008:

Who hasn’t experienced the problem of trying to find a cab on a Saturday night? If the cabbies hadn’t bitterly fought all efforts to increase the number of taxi permits – known as medallions – this wouldn’t be a problem.

Excessive regulation also meant that competition and innovation – the stuff that keeps industries efficient and healthy – were stifled. For example, with too few taxis to serve the city, airport shuttles and town cars rolled in to fill the void. But SF’s regulatory maze couldn’t accommodate them. According to a member of the city’s own regulatory staff:

“In other cities,” Heinicke said, “town cars and cabs are regulated by the same entity, which makes a lot more sense. I think we could also streamline enforcement so it was more administrative than courtroom.”

And as the city over-regulated, it also under-enforced. For example, Prop K specified that medallions could only be used by their owners, who were supposed to be full time cabbies. In practice, owners sold or rented medallions to unlicensed drivers, who forged the signatures of the actual owners on their “waybills”, or road logs. And the city looked the other way.

Consider this man, who made a lot of money off both our city and its regulator:

Then there’s Eugene Shu, an engineer with the city Water Department, who earns a $71,000 yearly salary and owns an $850,000 home and roughly $30,000 in securities, according to public records. Shu also claims to be a full-time cabbie.

SF Weekly, 2/14/02

By 2008, the system was unfair to most drivers:

Currently, cab companies, medallion holders, and rank and file drivers essentially function as a feudal system, with the serfs driving San Franciscans around in vehicles usually owned by the lording cab companies and permitted by older drivers who hold the coveted medallions.

SF Bay Guardian, 11/19/2008

As the guy making all that money off Luxor’s “legacy business” status noted regarding the SF taxi racket:

There’s corruption all over the place.

Luxor Cab President John Lazar, 2/14/2007

Nobody at City Hall wanted to deal with it. A 2005 editorial in the Chronicle described taxi permitting as a “failed” system, opening the piece with:

Approach any City Hall denizen and mention taxi permit reform and you’re likely to witness a grimace and a hasty retreat.

SF Chronicle, 3/29/2005

And all this takes us back to that website image at top. In 2008, the city hatched a plan to fold taxi regulation into the MTA. But there was a problem. The MTA, which also included our public transit (Muni) budget, was starved for cash.

Taxi drivers, the serfs of the industry, do not have high hopes about the merger. “If the merger happens, the MTA [officials] will be able to do whatever they please,” Williams said. “Everyone knows MTA is always in need of money … they don’t care about drivers or improving industry, only their budget.”

SF Bay Guardian, 11/19/2008

But the city assured everyone that no such plan was in play:

MTA spokesperson Judson True told us, “We have no intention of looking to taxi revenue to supplement existing Muni operations.”

SF Bay Guardian, 11/19/2008

Trust us.

2009 – the city breaks the industry (and ride sharing fixes it)

In 2009, to fill a gaping hole in Muni’s budget, the MTA began selling formerly free taxi medallions for $250k each. But only for new drivers. Existing drivers didn’t have to pay.

By 2018, about 40% of drivers had purchased the medallions, often going deep into debt to come up with the funds. This created at least six classes of taxi drivers making wildly varying amounts of money, according to this 2017 study:

This image has an empty alt attribute; its file name is driver-rev.jpg

As you can see, only a minority of medallion owners are actual drivers. This is, again, illegal, but the MTA does not enforce the laws.

The city attempted to give drivers with purchased medallions a break, with yet more rules – it created a scheme of preferential treatment for post-2010 drivers for airport pickups. The other drivers naturally sued. The value of the medallions dropped in value. More lawsuits. No new medallions have been purchased since 2016, and many drivers have defaulted on their loans, leading to, you guessed it, more litigation. There’s a reason our city requires armies of lawyers.

If fairly regulating taxi competitors was tough before, it was impossible now that the city had handicapped some drivers with $250k of debt. But there really wasn’t much competition, was there?

Enter ride sharing in 2010.

Companies like Uber and Lyft eliminated the deceptive practices and need for heavy regulation of the taxi industry. With a corporate backer and phone app, there was no way for fraudulent drivers to participate. With fixed rates and predefined routes, there was no incentive for overcharging. There weren’t even any meters to check. Seemingly overnight, a dirty industry had found a clean solution.

People loved it. I could get across town for $10 less, or to the airport for $20.

So did drivers, who came from all over California to make big money in SF. I sat next to a woman at lunch in Chinatown in 2017 who said she made $300 per day driving. The deficiencies of the taxi game were lain bare. Some studies show app based ride sharing even saves lives.

None of this is to say ridesharing is perfect, or that it doesn’t need some regulation, for example around paratransit (making sure rides are available to disabled people). But the opportunities for fraud are much lower. People quickly switched from taxis to ridesharing for some very good reasons.

As ridesharing exploded, SF’s elected officials stood around awkwardly and wondered what to do. Both Uber and Lyft had been founded in SF and employed hundreds of people here. Mayor Ed Lee, a political moderate, even proclaimed July 13th “Lyft Day” in 2013.

Mostly though, the city’s current crop of anti-corporate leaders has taken an critical stance toward taxi competitors, chipping away at ride sharing at every turn. I guess they feel bad for making such a mess of the taxi trade. Maybe that’s why they’ve dubbed us “A Taxi Town”.

How do we solve this mess? First, our city needs to give up on the $250k medallion scheme, and refund money to drivers who’ve purchased them on a depreciating basis. There are only a few hundred, and the medallion game is dead – a medallion worth $700k in Boston in 2014, for example, was worth $40k in 2018.

Most importantly, taxis, town cars, and ride sharing companies need to compete, as closely as possible with the same rules, in the same lanes, and with the same taxes and fees. In 2016, California attempted just this, with bill AB 650, which would have moved taxi regulation from cities to the same state agency that regulates ride sharing companies. The bill passed both houses of the state legislature, but Gov. Jerry Brown vetoed it. Ironically, the bill would have reformed taxi regulation in all cities and towns in California except one, which they decided was too big a mess to touch. Can you guess which one?

Even if taxi regulation remains at the local level, we must push for the type of deregulation that’s happening in other cities.

While price regulation was relevant in the days when taxis had a virtual monopoly over private car transportation, technology has changed this market. As has occurred in a variety of markets including airlines and telecommunications, it’s time for governments to deregulate the prices of taxis to generate fair competition and truly allow the best service win.

Rafi Mohammad, Harvard Business Review, 7/9/2014

Finally, no for-profit company should receive cash payments from taxpayers, or free advertising on the city websites, especially those of regulatory agencies. That just invites corruption. We’re not a “taxi town”, or an “Uber town”, we’re a citizen town, and city policies should reflect that.

On a more general note, as San Francisco’s far-left leaders expand further into the private sector with, for example, a public bank, the taxi mess provides a fair warning of why local government should probably stick to traditional services like public safety.

As legendary SF journalist Phil Matier noted, regarding proposed taxes on ride shares:

it will probably be the passengers — not the companies — who pay the new tax.

SF Chronicle, 3/16/2019

And that’s the ultimate rub. It’s not city leaders who bear the cost of a disorganized local government that reshuffles its priorities with each election. It’s you and I, with higher costs and lower standards of living.

Appendix

If you’re not sick of taxis yet, this 1983 Examiner article is a greatest hits of taxi industry woes – corruption, misregulation, litigation, you name it.

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