Terrible Town for Taxis
How a city permit system enabled a cartel to dominate the taxicab business, stifling competition and providing poor service.
It’s difficult to find a metropolitan area with fewer taxis than Milwaukee. This city has one taxi for every 1,850 residents. That compares to one for every 319 residents in Phoenix, one for 424 Chicago residents and one for every 551 residents in San Francisco.
The libertarian advocacy group, Institute for Justice, represents taxicab drivers in Milwaukee (who want an end to the cap on permits) and commissioned a study which looked at 14 other major cities and found none with so few cabs per population. The closest was San Jose, with one cab for every 1,678 residents.
Why? Milwaukee has a law that has capped the number of taxicab permits at just 321. But the true number may be lower. The Institute’s study noted that “some drivers report that several dozen licensed taxi vehicles are kept off the market in Milwaukee by some owners.” So the number of taxis actually in operation may be even lower, meaning the figure of one cab per 1,850 residents is more like 2,000 or so.
The city didn’t always have a cap on permits. Back in the 1970s, says Anthony Sanders, an attorney for the Institute for Justice, there were around 500 taxicab permits in Milwaukee. But in 1992, a city ordinance championed by then-Alderman Tom Nardelli put a cap into place. At time time, as a Milwaukee Magazine story by Marie Rohde reported, Ald. John Kalwitz opposed the move, suggesting a cap would drive up the price of permits. “I don’t want to see the cost of a license to go up to $10,000,” Kalwitz said.
His estimate was far short of the mark. “Interviews with drivers and vehicle owners revealed that as recently as April 2012, taxi vehicle permits were receiving hard bids in the private market for $165,000 (August 2011) and $175,000 (March 2012),” the Institute study found. “Some permit holders were refusing to sell, hoping that they would get as much as $200,000.”
The average value of those permits is about $150,000, the Institute has estimated. But Michael Sanfelippo, who operates several cab companies that control about 160 permits, claims the value is more like like $80,000. Sanders, however, notes the city didn’t contest its estimate of $150,000 in defending itself against the Institute’s suit, which claimed the city had created a legalized cartel that unjustly controlled the market for taxicabs.
And Circuit Judge Jane Carroll found the Institute’s argument quite compelling, ruling on April 16 that the city ordinance creating the cap on permits violated the state constitution’s equal protection and due process clauses. “The city, in essence, gave permit holders a significant asset,” she ruled. “That is where the problems come in with this law.”
Whereas most cities have a spread of large to medium to small companies that own taxis, Sanders notes, Milwaukee is dominated by one company: American United, which controls the permits for four different cab companies: Joe Sanfelippo Cabs, Inc., GCC, Roy WMS and Frenchy Cab. Those permits are all held in the name of Joseph J. Sanfelippo, the Institute found. Sanfelippo, the Republican state representative from West Allis, has said he holds no ownership in these companies and is merely the registered agent. In Milwaukee Journal Sentinel stories, Joe’s brother’s Michael has been spokesperson for the business, but Rohde’s story reported that Joe told people he handled the books for the company and cabbies said Joe worked there every Monday and Tuesday, taking in cash from cabbies.
Whoever owns those 160 permits, their total value is immense: at $150,000 per permit, they are worth $24 million. Drivers who lease cabs in Milwaukee typically pay an average of $700 a week, the study found, but some pay as much as $1,000. Cabbies told Rohde they paid $1,000 a week to American United. This would mean the Sanfelippo operation collects in the neighborhood of $8.3 million annually in lease payments.
But the Rohde and the Institute both found that cabbies also have to buy their gas from gas stations owned by American United. Rohde requested the net tax corporate tax paid by American United and found it was $102,822 in 2010, the most recent year reported. This would mean the company had profits of at least $1.3 million. Assuming it had an average corporate profit margin, this would mean the company was bringing in revenues of some $23 million.
The city’s cap on permits “enriches the privileged few,” Sanders argues, and assures that permit owners can charge an inflated price. In other cities, he says, this is an “entry-level, immigrant-friendly field” where a hustling entrepreneur might be able to build a business.
But in Milwaukee, the study found the average cabbie makes about $30,000 per year. To buy a taxicab permit costing $150,000 or more, “nearly half of a driver’s income would have to be dedicated toward financing a 15-year loan” at the prevailing interest rates.
Beyond this, “the artificial scarcity of cabs harms Milwaukee citizens and visitors through limiting competition in the taxicab industry and creating inferior customer service – including longer wait times for cabs and a lack of available cabs in modest and minority neighborhoods,” the Institute’s lawsuit asserts.
As a result of Carroll’s ruling, Sanders asserts, the cartel is dead. But that’s not how city officials seem to see it.
In reaction to the ruling, the city’s Public Safety Committee held hearings where dozens of taxi drivers called for an end to the cap, while others in the industry took a different view.
“Testimony was offered that the Milwaukee market cannot support a significant increase in cab permits,” notes Ald. Bob Bauman, a member of the committee. Too many permits would mean “cabs will not earn sufficient income to maintain their investments in the safety, cleanliness and comfort of the vehicles and the operation of modern dispatch systems” and “service could very easily decline,” he adds.
Bauman therefore offered a compromise which would repeal the current cap and authorize 50 new taxicab permits before Nov. 1, 2014, and 10 additional permits per year for five years after that. After the first year, he adds, “we can assess the state of taxi service” and perhaps allow a bigger increase than 10 additional per year.
Sanders, however, says this won’t open up the marketplace and won’t fly legally. “Unless the city wins on appeal, it’s not like they get a ‘do over’ with a ‘new’ ordinance, which is what it seems they believe. It still has to conform to Judge Carroll’s ruling.”
In short, the battle over Milwaukee’s taxis is far from over.