Few technological success stories in recent years have been more remarkable than that of the ridesharing market. Smartphones have expanded a niche industry mostly catering to airport travelers and downtown business people — traditional taxis — into a broader decentralized for-hire transportation product that reaches entire new classes of people. Today, ridesharing companies like Uber and Lyft transport millions of Americans.
Yet instead of embracing this development, some municipalities are looking at these companies with dollar signs in their eyes. Several localities have adopted ridesharing taxes in recent years, and the trend is spreading. While we should expect ridesharing companies to pay taxes to use our roads, in allowing localities to levy excise taxes on transportation firms states risk encouraging a burdensome and costly patchwork of tax rules.
The most recent example comes from Skokie, Ill., which imposed a tax on ridesharing services for trips that originate or end within the city's limits. Uber has responded by filing a lawsuit claiming the tax violates the state constitution, since it applies to activities that occur partially outside Skokie's jurisdiction.
Apart from the legal arguments, allowing hundreds of municipalities to impose their own ridesharing taxes is a terrible idea. A bevy of different taxes causes massive compliance headaches for ridesharing companies. Consider a shared Uber or Lyft pool ride with two passengers. The ride might originate in Chicago, drop one passenger off in Evanston and then terminate in Skokie. All three locales have ridesharing taxes, but which should apply? Sorting this out will raise compliance costs for ridesharing companies, which ultimately means higher fares for customers.
Most municipalities that levy these taxes justify them by arguing that ridesharing services should pay their fair share for the wear and tear they inflict on roads. But there's a better way to make sure ridesharing companies pay taxes: The majority of states — Illinois is one of only a handful of exceptions — pre-empt local ridesharing taxes, instead imposing a uniform tax rate at the state level and splitting the revenue between the state and the localities. This method, which is used to address similar incentives with other taxes, allows localities to collect revenue without imposing unnecessary compliance burdens.
It also supports the notion that states should be singular transportation markets for short- and medium-length trips. In most cases, for example, localities are not allowed to mandate jurisdiction-specific safety rules on cars and trucks that pass through them. This prevents them from making demands of companies in exchange for access to the local market. The same logic applies to town-specific taxes on ridesharing vehicles.
The city of Chicago justifies its ridesharing tax partially on congestion grounds, arguing that taxing ridesharing trips into the city will reduce traffic snarls in its busiest locations. While congestion-based road pricing is a great idea — one that many transportation scholars support — it only reliably reduces congestion if it applies to the vast majority of vehicles using the streets. Chicago's ridesharing tax exempts taxis, delivery trucks and private automobiles. Policymakers looking to ease traffic congestion will come up empty-handed if they continue to bet on incomplete policy solutions like taxes on a narrow segment of road users.
Chicago's tax also extends well beyond the most congested areas of the city, suggesting that it is really more of a revenue-generating tool than a transportation management policy. Should the tax push ridesharing vehicles off the roads, the extra space would quickly be re-occupied by untaxed personal vehicles, potentially increasing residents' auto dependence as they buy cars to take the trips they no longer can take via rideshare.
In the end, none of the arguments in favor of municipal-level ridesharing taxes holds water. To the extent that ridesharing services should be used to generate revenue, states should handle it at that level. A narrow exemption might make sense to allow cities or groups of municipalities to address congestion problems, but only if it is applied in an impartial manner.
The debate in Illinois has shown that there can be a fine line between an exemption-riddled congestion fee and a local rideshare tax. State policymakers can bring clarity to the boundaries of these policy mechanisms and in doing so limit the economic damage from any taxes that states allow.