The curse of the New York City taxi medallion

A taxi in Sunnyside. (chrisgoldny via flickr)
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Thirteen months ago, Mayor Michael Bloomberg took a taxi to the Bronx to declare victory in his bid to populate the outer boroughs with a new caste of cab called the borough taxi.

Unlike the archetypal yellow one, the borough taxi would be green. Its turf would be limited to all the places yellow cabs don’t typically go, like the outer boroughs and upper Manhattan.

And unlike taxi medallions—tradeable assets that sometimes sell for $1 million, a value derived from state-mandated scarcity—the three-year borough taxi license would be available to drivers for a relatively small fee.

"We were all told the odds against us were high, and that the Albany lobby was too powerful and that the improved taxi service law was dead in the water," said the mayor at the time. "But we refused to believe that that was true. We refused to bow down to the special interests. And when they hired every lobbyist in town we kept fighting, because we had the people on our side. This is the right thing for New York City."

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The mayor may have spoken a bit too soon.

More than a year later, the borough taxi remains a figment of the Bloombergian imagination, trapped in a tangle of lawsuits brought by politically empowered medallion owners.

DURING A RECENT RADIO INTERVIEW, A QUESTION about a different taxi initiative sent the mayor into a fit of pique about the peculiar way in which government-issued aluminum plates could bring such wealth to those lucky enough to own them, with the city cut out of the profit entirely. 

"The cab industry's a funny industry," he said. "I don't know of any other place in the world where the city gives a license and the people that have that license can then trade it and resell it and the city doesn't have any interest and any ability to share in the value going up."

That wasn't his only issue with the way this city runs its taxi and livery system.

"A normal market, you'd say, 'well, just issue more taxi licenses,'" he continued. "Wrong. Because they have bought the legislatures and stopped the ability to do that. It is one of the great ripoffs of the public any place I've ever seen."

The mayor is not alone in this belief.

In 2008, the Organization for Economic Co-operation and Development issued a report on what it calls “entry restrictions” by which governments artifically restrict taxi numbers within their jurisdictions, like, for example, with taxi medallions.

The organization's conclusion?

“The restriction of taxi numbers is a welfare-reducing regulatory intervention."

Also: Entry restrictions “typically lead to an undersupply of services," and, “In general, the value of such entry restrictions is converted into the value of licenses, rather than the earnings of a driver who rents their cab.”

THERE ARE 13,237 YELLOW TAXIS IN NEW YORK CITY.

That is or isn't an adequate number for a thriving city of 8.5 million, depending on who's doing the reckoning.

But the difficulty of finding a cab on a rainy evening in Midtown, and the robust market for medallions, suggests that there is at least some room for growth.

"Now, if the real passenger demand is for 15,000 cabs or 17,000 cabs, we have to go back to the state," Ashwini Chhabra, the city Taxi and Limousine Commission's deputy commissioner for policy and planning, told me. "They have to authorize the sale of additional medallions. It can’t happen in an organic way."

(Whether the city must also get a home rule request from the City Council is one of those legal questions now tied up in all that borough-taxi litigation).

Either way, it's an onerous process, particularly when you consider the medallion owners, who are litigious, politically active, and aggressively disinterested in alterations to a system in which they have flourished.

Back in the day, the idea behind the medallion system was not to create wealth for private parties and hold taxi policy hostage to those parties, but rather to civilize an anarchic ecosystem.

In 1932, 16,732 cabs roamed New York City streets, according to taxi historian Graham Hodges’Taxi! A social history of the New York City cab driver.

The competition “was merciless,” according to Hodges, and “Many cabbies turned to petty crime to help make ends meet.”

There were strikes, and there were fare wars. 

Ultimately, an alderman named Lew Haas decided to do something about it.

In 1937, he proposed a bill that would limit the number of taxis to 13,595, and make medallions automatically renewable, tradeable assets. It was signed that year by Mayor Fiorello LaGuardia.

“After the passage of the Haas Act, no one expected the medallions to ever be worth more than the ten-dollar license fee,” writes Hodges. “One of the drafters of the bill later commented: ‘It was a fluke; no one ever foresaw that these licenses would ever be valuable.’”

In 2011, two medallions sold for $1 million a piece.

With wealth has come political power, which has in turn made it possible for the owners to block improvements to the system that they perceive as a threat to their interests.

Recently, the medallion owners stymied two of Bloomberg's signature efforts to reform the New York City taxi system: the borough taxi plan, and his effort to reduce carbon emmissions by making the entire taxi fleet hybrid

The meteoric rise in medallion value, created by the medallion system that originated in the Haas Act, has accorded medallion owners what Chhabra describes as an “outsized voice, if you will, in taxi policy.”

“The medallion system creating that value has empowered the medallion owners and the medallion-owner lobbies,” he said. 

Meanwhile, because of the way the system is set up, the city doesn't benefit from that value on an ongoing basis, collecting only a five percent transfer tax each time a medallion is sold. 

“If we sold a medallion 30 years ago for $40,000 and that same medallion sells today for $1 million, the city doesn’t see any of that,” said Chhabra. “So that to me is a big negative.”

THIS ISN'T A PROBLEM THAT IS UNIQUE to New York.

"Victoria's taxi industry is dominated by a few major taxi licence owners," wrote a reporter in the Australian newspaper The Age this year.

Those taxi licenses can trade for half a million dollars, and the government sees none of the upside.

The Australian government would like to change that, and in September, a government-appointed commission issued a report that harshly criticized the taxi industry and called for a comprehensive overhaul:

The inquiry remains firm in its view that the current structure of Victoria’s taxi industry protects a relatively small number of licence holders from the effects of competition at the direct expense of consumers, taxi operators and taxi drivers. The inquiry has found no strong public interest grounds for continuing to restrict entry to the taxi market. As noted in the Draft Report, these restrictions are detrimental to competition and innovation, and make it very difficult for a wider range of people, including drivers, to operate taxi businesses. In addition, the holders of these restricted licences are able to capture a substantial share of industry income without re-investing their rewards back into the industry. This has a direct impact on consumers by driving up fares.

The inquiry's recommendation was that license holders still be able to trade their licenses, but that the state cap the value of all new licenses at $20,000 per year, in perpetuity.

The government is expected to respond in April.

In the meantime, the industry is up in arms.

That's because the market value of existing licenses, which are tradable assets, as they are in New York City, declined, following the report’s issuance, to about $320,000, according to the commission.

The industry is responding to the recommendation much as the taxi industry here would respond, in the impossible-to-imagine event that such a scenario would ever be replicated in New York: by fielding its army of lobbyists

ASKED HOW HE WOULD STRUCTURE NEW YORK CITY'S taxi industry if he were he to do so from scratch, Chhabra said he would eliminate the medallion system entirely. 

”If we knew then what we know now, I’m going to go out on a limb here and say ... we would not have issued medallions that create a property interest, because we know that the market for taxis is solid, we know that New York has been a runaway success story," he told me. "And so if you got a license back then that was good for three years, or four years or five years, you would have made your money back and then some ... and we would have realized the revenue from those repeated license sales. And today we would be selling New York yellow taxi licenses for God knows how much.”

Of course, the likelihood of abolishing medallions in New York City is effectively zero. 

“There are medallions and there continue to be medallions,” said Chhabra.

He offered that they do have some benefits.

“Look, on the yellow taxi side, again this comes where there’s a million-dollar asset, you can require more of that industry,” he said. “So we don’t have a problem telling the yellow-taxi owners you need to refresh your car every three years.”

Chhabra argues that the borough taxi program is actually something of a workaround to to the medallion problem.

"You know what, the reason we have to create borough taxis is because, turns out 13,237 is just about enough for the Manhattan core, and at rush hour, that’s not even enough," said Chhabra. "And so we can’t have 80 percent of the city without taxi service."

But there is a strict limit on the number of those licenses that can be issued: 18,000. Which is all well and good, except that, should the demand for borough taxis end up outstripping supply, the city will have to go back to the state legislature to get approval for more.

It can't, in other words, merely take the executive action of issuing them.

To protect their turf, borough taxi licensees may very well fight any expansion of borough taxi supply in the legislature, and should that fail, in court, much as medallion owners have done before them. 

Even as it addresses a real problem of lack of access to taxis for a large chunk of the New York's population, the city will have created a medallion-like system, with many of its attendant problems, all over again.

CORRECTION: The original version of this article was updated to include the fact that the city collects a transfer tax on medallion sales.

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