Nickel and Diming Innovation to Death

Massachusetts resurrecting old tradition of taxing entrepreneurship

In the early days of the automobile, cars were prohibitively expensive. However, as is known to happen in a free market system, entrepreneurs responded, purchasing cars such as the Model T to offer rides for a “jitney,” or nickel. Thus, a badly needed service was provided to would-be consumers by enterprising individuals.

As is also known to happen from time to time, government sought to stifle innovation rather than foster it. Cities quickly regulated and outlawed those services, but the concept managed to survive on the proverbial black market. To this day, people who provide off-the-book transportation services are derisively called “jitney drivers,” betraying a soft contempt for entrepreneurs who are able to provide a better service to consumers for less.

What’s old, it seems, is new again.

The Commonwealth of Massachusetts is creating a new tax on Transportation Networking Companies (TNCs) to the tune of $0.20 per ride. Of the $0.20, five cents, or a full jitney nickel, will go to none other than the taxi industry itself. The law attempts to justify this unprecedented subsidization of the taxi industry by claiming, “the money will help taxi businesses to adopt ‘new technologies and advanced service, safety and operational capabilities’ and to support workforce development.” In other words, Uber and Lyft will be compelled to fund their perceived competition.

Uber and Lyft are popular because they serve areas into which taxis will not go. The innovative transportation companies provide services cheaper, faster and more reliably than taxis. In a free market, the taxis would do their best to match superior TNC services. This proposed solution, however, does nothing but stifle creativity, harm consumers and allow a substandard service to continue limping along, insulated from its own shortcomings.

This tax is in direct conflict with the ALEC Principles of Taxation. According to the principles, taxation schemes should be transparent and fair, among other things. This tax is not transparent, but is hidden with the rates TNCs charge passengers. The taxpayer, therefore, will end up suffering economic harm without fully appreciating why.

This tax is hardly fair, in that it discriminates against a single industry. In fact, it applies only to a particular type of service within the industry. Taxes that target such small subsets of a state’s economy raise barriers to commerce, producing a set of disparate rules by which one driver must play but another, for no logical reason, must not. When taxes are narrow-based and discriminatory, government isn’t collecting revenue to provide core services; it is shackling industries and burdening commerce.

TNCs should not be punished for the taxi industry’s failure to keep up with higher consumer standards for price, availability and convenience. TNCs and their customers should not be punished for the poor quality service taxis have traditionally offered. And all this assumes the taxi industry will utilize the money to enhance their services.

The specifics of how the money will be collected and used, along with any accountability measures were not included in the law. Instead, “Regulations for how the fee will be collected and a plan for how it will be spent still need to be drawn up, said Mark Sternman, a spokesman for the state’s MassDevelopment agency, which will be in charge of the money.”

The law specifically forbids TNCs from passing the tax onto its drivers or passengers. While the law provides cover for Massachusetts legislators, it is naïve to think TNCs will not pass the tax onto the consumers. Rather than adding an additional fee, it is more likely TNCs will increase the base fares.

The law does provide that the additional fee will disappear after time. The subsidy to the taxi industry will sunset in 2021 and the whole fee will disappear in 10 years, in 2026. However, the pages of fiscal history are littered with examples of “temporary” taxes that were anything but. For example, in 1936, Pennsylvania enacted a temporary tax on alcohol to pay for the rebuilding of Johnstown, a town destroyed by floods. The revenue needed to rebuild the town was collected by 1942, but the tax never went away.

On the one hand, Massachusetts should be lauded for enacting a framework allowing Transportation Networking Companies to operate in the Commonwealth. On the other, though, this new discriminatory tax blatantly buys off the taxi industry, giving a whole new meaning to the term “jitney nickel.”

In Depth: Innovation

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