March 17, 2017

Alaska: Ridesharing’s Last Frontier

Testimony before the Alaska House Labor and Commerce Committee
Summary

In places where taxi regulations have stifled competition and customers have low-quality or insufficient service, state preemption of local for-hire regulations will allow conditions to improve.

Key materials

Good afternoon Chairman Kito, Vice Chairman Wool, and members of the Alaska House Labor and Commerce Committee:

I am grateful for the invitation to discuss research that my colleagues at the Mercatus Center at George Mason University and I have conducted regarding the sharing economy in general and transportation network company (TNC) regulations in particular.

The research team I am part of—the Project for the Study of American Capitalism—focuses on understanding how special interest groups twist government policies to benefit themselves. We study discriminatory tax, spending, and regulatory policies that privilege particular industries, firms, or occupations. Our goal is to communicate how these government privileges harm the economy and the very fabric of our society. This is the perspective through which I will evaluate the current state of taxi and TNC regulations in Alaska.

House Bill 132 (HB132) represents some of the best TNC legislation I have seen to date. It enables TNC operations while at the same time avoiding other states’ mistake of enshrining current business practices into law. However, I would argue that HB132 has a hidden flaw—it creates a special legal definition for TNC vehicles and drivers, rather than breaking down the regulatory silos between taxis, TNCs, limos, shuttles, and other for-hire vehicles. The rule of law demands that there be generality of application of regulations. The best way to accomplish that, and avoid repeating the long history of local regulatory capture, is to have one common set of for-hire regulations enacted at the state level.

The Problem of Privilege

First and foremost, government-granted privilege harms the economy by restricting competition, meaning that customers face higher prices and lower-quality goods and services. The protection from competition shields producers from the consequences of bad decisions, resulting in higher overall costs and slower economic growth. Furthermore, the fact that producers can compete for political favors encourages “unproductive entrepreneurship.” This means that innovators find it more beneficial to court government officials’ favor than to focus on satisfying customers—in essence, the best minds are redirected toward unscrupulous ends. This then creates the public impression that both business and government are corrupt, eroding the unspoken sense of trust that is the foundation of society.

Alaska’s Proposed TNC Legislation

Alaska is now the only state in which TNCs are not currently operating. The legislation under consideration today represents some of the best state-level TNC regulations thus far proposed. This is because many other states’ TNC laws enshrine the current business practices of Uber and Lyft, rather than create a simple set of regulations that allow for future innovation. In particular, HB132:

  • Stipulates that the TNC “may charge a fare” but allows for the possibility that the TNC may only connect the driver and rider without also participating in the fare collection. Most other states do not allow for this flexibility and even forbid cash to be used in the transaction, which, counterproductively, makes tipping your driver illegal. More importantly, a prohibition on cash payments would prevent low-income persons lacking access to credit cards from using the same service available to everyone else.
  • Requires that TNCs conduct a national criminal history background check and driving history report, but does not mandate what kind of background check or which crimes, driving citations, or time period considered would disqualify a driver from providing service. This forces the TNC to take greater responsibility for the drivers that it allows to provide service through its network and avoids needlessly forbidding some people from access to much-needed jobs. By not mandating a specific standard, this approach also allows for greater degree of innovation in background checks, meaning that for-hire services might become even safer over time.
  • Creates clarity in the employment status of drivers, stipulating that drivers are independent contractors if the TNC does not prescribe working hours, does not prevent drivers from working for competitor TNCs or any other business, and does have a written agreement with the driver on independent contractor status. Importantly, the bill does not force TNCs and drivers to use this kind of employment relationship—for example, it allows for flexibility in employment status if TNCs want to provide some future service whose drivers might need specific training.
  • Does not set a particular TNC licensing fee, which could serve as a barrier to entry to smaller competitors. During my recent testimony before the Virginia Joint Transportation Committee, a representative from the Virginia Department of Motor Vehicles stated that the state’s abnormally high licensing fee—$100,000—was keeping out several small TNCs that wanted to enter the state to compete with Uber and Lyft. 

The Most Controversial Aspect of HB132

Perhaps the most controversial aspect of Alaska’s proposed TNC regulations is the preemption of local regulation of TNCs. In a state that prizes rugged individualism as highly as Alaska, this provision must surely rankle.

However, preemption of local regulations on vehicles for hire—both for TNCs and for taxis, limos, and shuttles—is exactly what is needed. For-hire vehicle regulations, especially regarding taxis, are commonly used as the textbook example of overregulation, demonstrating how regulations can be “captured” by the regulated industries themselves. Our recent paper, “Rethinking Taxi Regulations: The Case for Fundamental Reform,” lays out how regulatory barriers to entry, price controls, and mandated business practices inhibit competition, thereby granting a measure of monopoly power to established companies. 

This privileged status motivates established companies to fight hard to maintain the uneven playing field, which they do by attempting to justify policies like Anchorage’s taxi medallions or Juneau and Kodiak’s requirement that new taxi companies must obtain a certificate of public convenience and necessity. But a Federal Trade Commission (FTC) report on the history and efficacy of taxi regulations found previous arguments for anti-competitive regulations to be disingenuous:

The discussions of the early 1930s [of taxi regulations across the United States] emphasize that the motivation behind the regulations was “to drive many cut-throat cabs, operating without authority, from the streets” and to enable the organized cab fleets and transit companies to increase their profits. Restriction of entry was not motivated by a concern for congestion or pollution externalities.

In fact, in 2013 the FTC commented on the proposal to open Anchorage’s taxi market, which was finally passed by the city council last December. Their position, like that of essentially all economists, is that more competition results in greater benefits for consumers:

Because new entry and competition may generate consumer benefits and are unlikely to harm consumers or competition, staff strongly supports eliminating restrictions on the number of vehicles that may provide taxicab service by 2022, or sooner, if practical. Staff also recommends that rates relating to the business of passenger vehicle transportation services should generally be set by competitive forces where there are no restrictions on entry.

As might have been expected, though, taxi medallion owners are fighting back against the loss of their regulatory protection. They have now put a proposal on the April 4 ballot to repeal the city law allowing for the sale of more medallions. This essentially follows a pattern repeated state-by-state over the last several years, where the taxi lobby has vehemently opposed allowing new taxis or TNCs to operate. And the taxi lobby has especially opposed state preemption of local regulations since local taxi companies have less influence at the state level. 

Conclusion

Local leaders, of course, want the best for their constituents, but at the same time, they face strong pressure from taxis to maintain the status quo. It is precisely because of such vigorous resistance by entrenched special interests that state preemption of local regulations can be useful. It allows local lawmakers an acceptable exit from a difficult situation. This is the approach that Michigan just embraced in passing TNC legislation last December, and Texas and California are now also considering statewide taxi deregulation.

In places where taxi regulations have stifled competition and customers have low-quality or insufficient service, state preemption of local for-hire regulations will allow conditions to improve. In other cities that already have relatively light taxi regulations, like Fairbanks, Wasilla, and Kenai, residents might not notice much of a difference, but they’ll be protected from any future regulatory takeovers by taxi special interests.