Taxi operators trapped in a government snare

For many years, the city of Minneapolis had capped the number of cabs allowed to operate within the city limits, not issuing any new licenses. The result of that restrictive policy was greatly to the benefit of those who already had taxi licenses, and the "market value" of existing licenses rose to $25,000. There were many others who wished to enter and compete in that market, but the only way to do so was to deal with companies who already held licenses. The city policy had, in reality, created a cartel with a monopoly.

In October of 2006, the city of Minneapolis removed the artificial cap on the number of licenses, increasing the number of taxis allowed on the streets each year until 2010, and then removing the limit altogether. Doing so will have many benefits. Operating a taxi is an excellent business for small, often minority, entrepreneurs who can compete by providing service to areas not well served by larger companies, or by providing superior service or prices. As in any industry, open competition improves service for customers.

Governments have long been successfully lobbied by existing businesses to pass licensing restrictions that will keep out new competitors. We've watched as Minnesota hair-braiders won the right to perform their services without having to complete expensive cosmetology training, even though the training once required had nothing at all to do with the service they wanted to provide. There are innumerable examples of similar restrictions that serve no purpose except to eliminate competition for existing licensees.

The City of Minneapolis took an overdue but admirable position when it removed taxi licensing limits. Doing so corrected an unjust and anti-competitive policy. There are, however, those who will lose.

Current taxi license holders know that, as limits are removed, the value of their licenses will drop dramatically. Those who bought licenses at prices inflated by the old and wrongful closed market will indeed lose value. What was worth $25,000 in a closed market will be worth no more than a new license issued under the new rules. Current license holders have formed a coalition to fight the rule changes and have filed suit seeking to force a return to the closed market.

Legally, the issue has some complexity. The coalition of current license holders is claiming that the rules change constitutes a "taking" by the city; in effect destroying the value of current licenses. "Takings" are unconstitutional under both the U.S. and Minnesota Constitutions.

On Friday (Aug.31st), I listened as my friends at the Institute for Justice presented oral arguments before Judge Franklin Noel, Magistrate Judge, U.S. District Court, seeking a dismissal of the suit brought by the taxi-owners coalition. IJ's case was presented by Scott Bullock, who represented the Kelo homeowners before the U.S. Supreme Court. (more background).The coalition was represented by counsel as well. Judge Noel challenged both attorneys about similar cases that might serve as guiding precedent.

I'm certainly not an attorney, and I am just as certainly in favor of open markets, but the case is not simple. I feel for the taxi license holders, many of whom are recent immigrants, who could only get into the taxi business by purchasing licenses made artificially valuable by the government's closed market. If the licensing rules had been reasonable to begin with, this quandary simply wouldn't exist. The city government created the problem and will now cause harm to individuals by correcting it's old bad policies.

There is no question that the city of Minneapolis, by opening up taxi licensing limits, corrected a wrong that had been in place for a long time. That wrongful limitation had been pushed by existing taxi license-holders in order to line their own pockets through unfair advantage. That, after all, should be the deciding factor for Judge Noel... that the current licenses had high value only because of wrongful restrictions they pushed for. The value lost by them should never have existed in the first place. It was an artificial value. The real value of a taxi license is the freedom to compete for business, and the existing license holders have not lost that real value.

We might find some parallel in the tax preparation industry (larger than the auto industry). Tax preparation businesses exist only because filing taxes is complex. If income taxes were eliminated, or replaced by a simple system, tax preparers would suffer an even greater loss than the local taxi operators.

As I've written before, governments, in literally thousands of cases, through regulation, subsidies, and licensing, give advantage to larger corporations and handicap competition from smaller entrepreneurs. In many cases, governments actually stop competition and create lucrative monopolies.

The taxi coalition would wish to have the city return to a bad system that benefited existing operators at the expense of the public and others who wish to compete for their business. Hopefully, Judge Noel will view the case in the same way, and dismiss the coalition's suit.