It is common to talk about the ways that technology is disrupting governments, and everything else for that matter. But there is one timely topic that illustrates how technology could help governments more efficiently capture value for themselves.
Specifically, taxi medallions, which give their owners the right to operate taxicabs.
Taking New York City as an example, the market price for a taxi medallion peaked at around $1 million in recent years. Considering that there are 13,000 issued taxi medallions, that implies that the total market value of the right to pick up passengers on New York City streets is worth about $13 billion, or, if you want to think on annual terms, roughly $1 billion dollars a year (assuming you could finance that $13 billion at a moderate cost of capital).
Due to competition from Uber, NYC medallions are going for around twenty percent less than they once did because people doubt how valuable the asset will be over time. But that doesn’t actually mean that the theoretical right granted by a taxi medallion is worth any less; it just means there is uncertainty about how the government will enforce its historical monopoly over the right to pick up passengers off the streets.
Either way, the kicker is that the city government isn’t getting paid $1 billion a year for taxi medallions because it sold the vast majority of the medallions off long ago. They did this for several reasons, including the fact that administering and collecting fares themselves would be too difficult to manage.
So for decades, middlemen have effectively been collecting this rent by holding medallions and having cabbies rent the medallion from them—middlemen are making the government’s money. The government could sell roughly seven percent more licenses every year to make the math work. But that game only works for so long because if you increase supply over demand the medallions will become worthless.
But, as there continues to be a clear and growing market around picking passengers up on the streets in cities, local governments should decide whether they want to abandon this historical monopoly and the associated theoretical revenue to Lyft, Uber and others, or if they want to switch models to more directly capture taxes on rides.
While in the past it would have been impossible for the government to manage the accounting and enforcement on a per-ride basis, technology is now changing the game and making how cities like New York have historically monetized their asserted monopoly look extremely inefficient.
Looking Back
This all happened before. Just look at tax farming in the Ancien Régime. The very abbreviated version is that in 1680 the French government sold licenses to collect taxes to tax farmers. Slightly less than a century later, in a period of great technological change, and in no small part as a result of this outsourced tax structure, the regime fell, and taxes were in-sourced by the government.
There were several reasons that the French decided to license third parties to collect taxes on their behalf in the late 1600s. One was simply that taxes were unpopular, and the crown wanted to put a little distance between the tax collectors and the regime. The most powerful reason, however, was that the government had a hard time managing its own tax collection and efficiently managing its affairs with meaningfully fluctuating revenues year to year.
Rather than deal with the bureaucratic complexity of collecting taxes from everyone, as well as take on the risk and complexity of managing fluctuating revenues, the government chose to take a steady revenue stream from a small number of private citizens and agencies that it could easily know and manage. It let the tax farmers deal with the complexity of record keeping and take on the financial risk.
Over the next 100 years, two things made what once seemed like a reasonable trade by an non-technologically-advanced bureaucracy unsustainable. First, the financiers sitting between the government and the people got far too rich and powerful and were a major contributor (along with opulent crown spending) to social upheaval. So the government had a growing reason to diminish their power and curb their tax collection rights.
Second, technology and bureaucracy advanced markedly, making it possible for a central government to directly administer its own affairs without middlemen. Developments like wider-spread literacy, the growth in printing, better trained bureaucracy and a better understanding of basic finance moved the world away from tax-collecting middlemen.
Of course, with the French Revolution the whole system turned over and the French government (after a few false starts) moved away from tax farmers and towards direct administration.
Looking Ahead
There are some parallels between modern taxi-medallion holders and the tax farmers of the Ancien Régime. Just like the tax farmers of the 1700s, taxi-medallion holders have made money by buying a right to a government monopoly. They helped the government by providing cheap and predictable cash and eliminating the management complexity of the government running its monopoly on its own.
Now, I think local governments should be more directly monetizing their monopoly. They should cut out, or at least phase out, the taxi medallion model, and implement direct taxes on all rides regardless of provider. Those taxes should be high enough so that, in the New York example, the city is making the $1 billion a year that the market has been valuing its monopoly.
One risk to municipalities taking back medallions that they sold is that it will make it harder for them to sell other assets in the future by suggesting they will go back on their promises. Perhaps liquor licenses will be devalued as assets, or in the extreme, people will be a bit more careful with municipal bonds.
However, I think it’s a no-brainer. New businesses are expanding the market and in a way that has the potential to increase the value of cities’ local monopoly. All they need to do to seize it again is use technology to create an effective system for executing.
Phasing this in would be a challenge. You would likely run a dual system for a while, where you made every driver—including those driving Ubers and Lyfts—report all trips to the government. New York is already taking steps in this direction; as of 2013, the city is requiring yellow cabs to pay an additional flat tax per ride. Then, you would add a meaningful per-trip tax to each ride, but exempt the medallion holders from paying it for a few years to ease the transition.
This will cut into the profitability of companies like Uber; however, if they play the change right, it could entrench them more by making the government reliant on their accounting and processes for meaningful revenue.