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Last week, a federal judicial panel announced that the challenges to the Federal Communications Commission’s repeal of the Obama-era open internet rules will be heard by an appeals court based in San Francisco. At the same time, Councilwoman Rebecca Kaplan announced her proposed ballot measure that would make Oakland the first city in California to impose a tax on internet ride-hailing companies such as Uber and Lyft. It seems somewhat ironic that in the same state, at the same time that the case for and against a so-called neutral internet carrying data is heard, discriminatory taxes may be imposed on the users of ride-hailing apps that are not imposed on those hailing a cab in the traditional manner.
Kaplan proposes her tax as a means of raising millions of dollars to help pay for local public transportation and infrastructure improvements. This claim is remarkably resonant of the justification used by internet service providers (ISPs) wishing to charge application providers (in addition to their subscribers) to fund the infrastructure necessary to carry internet traffic. Kaplan claims the ride-sharing app providers are “using our streets to do business, and we don’t currently get any revenue from it.” A similar proposal in San Francisco for a tax of $0.20 to $1 per ride would raise an estimated $12.5 to $62.5 million annually. Other US cities, such as Seattle and Chicago, currently impose add-on fees ranging from 14 cents to 40 cents per trip. Since 2016, Massachusetts has imposed a 5-cent fee to subsidize the state’s taxi industry.
But is it so simple?
The argument for taxing online rides but not classically hailed ones to “level the playing field” in using roads and other infrastructure begins to break down, however, when considering that a raft of taxes and charges are already imposed on the owners and operators of motor vehicles to meet costs. These charges apply whether vehicle users are public or private and whether the use is for commercial or noncommercial purposes. Charges include highway tolls, state gas taxes, and user fees for license registration, vehicle weight, and the like, and the charges must be paid by trucking companies, taxi firms, Uber drivers, and private motorists alike, in some rough proportion to their use of the infrastructure.
Furthermore, in some states, ride-sharing services are also required to pay regulatory fees just like the classic taxi firms. In California, Lyft confirms it is already “regulated at the state level by the California Public Utilities Commission (CPUC) and currently pays fees to the CPUC. A city-specific tax does not exist anywhere across the state.”
If online firms are required to pay fees that established taxi firms are not, then these fees are quite simply discriminatory entry barriers that protect existing providers from competition. This line of argument will be heard in the net neutrality appeal, in support of the claim that ISPs charging content providers to deliver their material is discriminatory and non-neutral. Arguably, the add-on ride-sharing app fees charged in Seattle and Chicago meet this definition. The Massachusetts tax most surely has an anticompetitive purpose if it is to subsidise existing taxi operators. However, the promotion of competition and the promotion of efficient networks are not always aligned: When other regulations require taxi firms to cross-subsidize unprofitable routes from profitable ones, some limits to competitive entry may be needed to ensure equal-priced citywide service coverage remains. What matters is the reason for applying the tax, not simply the fact that a tax is imposed.
Paying for infrastructure, not penalizing innovative entry
At the crux of both the internet neutrality and the Oakland taxi-tax arguments is the source of funds to pay for the creation and maintenance of the necessary underlying infrastructure. Where there are efficient means of charging users (both the operators of trucks and cars carrying goods and passengers and the passengers and end-users of the goods carried to them — or both the senders and receivers of internet data) there will be sufficient infrastructure of the appropriate kind to meet demand. However, when the user-charging mechanisms are inadequate or fail to keep pace with changes in the costs of providing the infrastructure, then other sources of revenue must be found.
In the case of constructing roads, over time the share of infrastructure costs met from user-related fees has fallen, leaving it to state and federal taxes to make up the difference. The consequent between-state and between-user inequities have in part fueled the search for additional means of cost recovery (e.g., Kaplan’s proposed tax). Ironically, California is one of the states where user charges make up a larger proportion of road construction costs (61.8 percent) than state and federal tax subsidies (in North Dakota and Alaska, the shares are 22.8 percent and 12.0 percent, respectively).
User pays: Fairer in the long run
The salient lesson for both the court hearing the net neutrality appeal and the Oakland municipality considering a proposed tax on internet-based ride hailing services is that in the long run, the fairest means of paying for the construction and maintenance of key transportation infrastructures (be they physical roads or the internet highways) is to keep as close a nexus as possible between network costs and the charges imposed on those making use of them. There are many different points along the supply chain where this can be achieved. Keeping all options open and using them wisely is preferable to using blunt one-size-fits-all instruments. Using state and federal taxes to subsidize a gap between costs and revenues is but one option. It is a last resort but becomes inevitable when the fees charged fail to keep pace with changing costs and demands.
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