Taxing the New Economy, Starting With Uber, Lyft

Unlike old-economy taxicab companies, the new ride-hailing services often pay little to none of the license fees or taxes that taxi businesses hand over to cities, counties and states for the right to operate.

by Elaine S. Povich, Stateline / April 14, 2017
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First in an occasional series of stories on how states are overhauling tax codes to adapt to a new economy.

If any service best reflects the new economy, it may be hailing rides on demand from big companies like Uber and Lyft. They let riders avoid the hassle of flagging down a taxicab by simply tapping a mobile application on a smartphone. A driver arrives within minutes to take them to their destination.

But unlike old-economy taxicab companies, the new ride-hailing services often pay little to none of the license fees or taxes that taxi businesses hand over to cities, counties and states for the right to operate. If anything, their appearance on the scene reduces the taxes and fees that government counts on by taking customers away from the old-economy taxis.

That’s changing. Some states and localities are starting to tax the ride-hailing services. It’s not just an attempt to replace the revenue they’ve lost from the taxicab industry as a result of the new competition. Taxing the transportation network companies also is a sign of how governments are seeking to overhaul their tax structures in response to a rapidly changing economy that relies more on internet-based services than manufacturing and traditional bricks-and mortar retail shopping.

“When we see the economy evolving this quickly in front of our eyes, it can be a wake-up call to lawmakers that times are changing and a tax code written decades ago needs to change with it,” said Carl Davis, transportation analyst for the progressive Institute on Taxation and Economic Policy.

By simply imposing ordinary sales taxes on the ride-hailing industry, the institute estimates state and local governments could raise $300 million a year in revenue.

So far, barely more than a handful of states — including Maryland, Massachusetts, Nevada, Pennsylvania and South Carolina — have subjected ride-hailing services to existing sales taxes or imposed extra taxes or fees on them. Pennsylvania, for instance, assesses a 1.4 percent tax on all rides under a new law approved in November. New York’s budget, passed just last week, includes a 4 percent tax on the transportation network companies as part of an overall regulatory scheme.

Most of the new taxes and fees are included in new regulations, as states move to tame the upstart industry, set legal standards for drivers and protect passengers. 

But establishing a new regulatory and tax framework isn’t always easy. An effort to do so failed in Georgia this year after a barrage of criticism from the ride-hailing services, which mounted a campaign to oppose any new taxes.

Part of the problem is that in most states, sales taxes do not apply to taxi rides, although many taxis pay “medallion” or “hack licenses” fees. The patchwork approach to taxing ride services or taxis is just one example of how state tax codes in many cases have not kept up with all the ways the economy has changed.

“Most states don’t tax taxi rides under their sales tax,” Davis said. “That’s largely a historical accident. The states exempted services in general — lawn care, pool cleaning — and taxi rides fall into that category, as well.”

State tax codes, just like the federal one, have not been overhauled in decades and no longer match the behavior of consumers, who increasingly are buying their goods online and turning to fuel-efficient hybrid or electric cars.

The change in behavior has upended two pillars of state and local tax codes: Taxing purchases at bricks-and-mortar stores, and taxing fuel at the pump. Because many internet sales elude sales taxes (despite Amazon’s agreement to start collecting the taxes), state and local treasuries are suffering. And because most highway and street repair is financed by taxes on the amount of fuel sold, states have less money to make those repairs.

This article was originally published on Stateline. Stateline is a nonpartisan, nonprofit news service of the Pew Charitable Trusts that provides daily reporting and analysis on trends in state policy.