Madison’s Taxi Regulations Stifle Innovation, Competition

More competition would open door to new companies

Picture yourself as an ambitious but cash-strapped student at the University of Wisconsin. You have a job to help make ends meet, but you also have an entrepreneurial bent. You like taking on projects and are goal oriented. Always on the lookout for an opportunity, you stumble across a novel idea while talking to the owner of a local bar and grill.

The barkeep is worried about students and other customers who have had a little too much to drink, particularly on the weekends. He wishes he could provide a cheap, safe, and reliable transportation service for these patrons. As a budding entrepreneur, you recognize an opportunity.

So, you strike up a deal. You will provide a taxi service for the less responsible drinkers. You estimate, using your car and a cell phone, you can charge $5 per trip in the neighborhood and $10 per trip outside the neighborhood. Trips outside the city would cost more, but you want to handle that on a case-by-case basis.

The only problem with this scenario is that it would be impossible to start this business in the City of Madison. Among other things, local regulations would stifle your business because:

  • a 24-hour service requirement means your business has to run all day, seven days a week. Part-time operators need not apply.
  • the graduated flat fee could violate the city’s code that all fares must be set by a trip meter or zone.
  • the city’s public-hearing requirement subjects your business to a political approval process through the Transit and Parking Commission. Existing operators can object to the new cab company, and even argue against issuing a license based on its potential impact on their bottom line. As a new operator, you need to prove that your fledgling enterprise will exist for “public convenience and necessity.”
  • The business is required by law to serve the entire city-not just the market niche you have identified.

These are just a few of the elements of the city code that make it difficult to start up a taxicab company in Madison. Not surprisingly, the taxicab industry has been dominated by three large companies with little serious threat of new competition.

While these restrictions may make it easier to regulate taxis-a smaller number of taxicab companies facilitates monitoring-they discourage entrepreneurship and job creation, particularly for low-income and minority residents. In fact, when local taxi markets have been reformed to allow more competition, new companies have sprouted:

  • After Indianapolis eliminated its 24-hour service requirement and a cap on licenses, 32 companies sprung up within six months. Two-thirds were owned by minorities and women, and 158 new cabs ply the streets of Indianapolis.
  • Once Colorado allowed entry into the Denver market, Freedom Cab began operations and currently employs 100 drivers.
  • Cities that open their taxicab industry to more competition experience a 23% increase in the number of cabs, drivers, and companies on average.

Thus, opening up the local taxicab market can generate jobs and stimulate neighborhood-based economic development.

More specifically, the city of Madison can promote economic opportunity in the taxicab market, and embrace the dynamism and innovation of the local economy, by

  • Repealing the 24-hour and citywide service requirements;
  • Licensing operators and companies through an administrative rather than political process;
  • Eliminating economic impact on current operators as a justification for denying a license to a new operator;
  • Eliminating public convenience and necessity criteria for granting a new license;
  • Eliminating mandatory breaks in driver hours to enable part-time, owner-operator companies.

These changes will not remove the city from the regulatory process. Rather, it will shift direction away from micromanaging the taxi market to one based on performance. In one case a few years ago, an applicant was denied a license in part because he had been fired by the existing companies. Entrepreneurs, however, are unlikely candidates for employee of the week. They typically are driven by a desire to provide a service or product that the current market does not, creating an inherently tense relationship between employer and employee.

The quality of the product delivered to consumers should be the primary focus of local regulations, not the internal personnel policies or financial health of existing taxicab companies.

A more effective way to regulate the local taxi industry while encouraging entrepreneurship would be for the City of Madison to focus on health, safety, and fraud in the taxi market. These regulatory goals can be met by annual and random inspections vehicles, minimum bonding requirements, criminal background checks, and an expedient system for lodging complaints with local law enforcement authorities. Beyond these functions, local regulations tend to restrict entry and reduce competition while providing little benefit to consumers. A performance-based system, in contrast, maximize the potential for innovation and job creation while ensuring consumers receive a quality product.

Samuel Staley is director of urban and land use policy at Reason Foundation and co-editor of the book “Smarter Growth: Market-Based Strategies for Land-Use Planning in the 21st Century.”