By Tegan Truitt
Fourth blog in our series on the Colorado Green New Deal
The indirect, and in some cases the direct consequences of the Colorado Green New Deal will not be pretty. Among the bills comprising this stream of environmental legislation is Senate Bill 239, which Governor Jared Polis signed into law on May 31, 2018. 239 aims to reduce carbon emissions by disincentivizing taxis and small delivery cars (“vehicles used for commercial purposes,” as the bill puts it – this excludes vehicles delivering “freight,” e.g., wholesale delivery) and constructing new electric vehicle (EV) infrastructure and improving public mass transit.
A commercial vehicle, as defined by the bill, is a broad concept. It includes vehicles operated by rideshare services like Uber and Lyft, taxis, rental car agencies, and those “used for the residential delivery of goods.” From Lyft to your local pizza parlor to Amazon’s residential delivery service, will be hit by 239.
Once it goes into effect, the bill will impose environmental “fees” (de facto taxes) on companies that operate commercial vehicles. The revenue will then be used to fund the aforementioned green alternatives – EV infrastructure and expanded mass public transit. The mechanics of this fee collection/subsidy program are hazy, however. We don’t know whether the fees will be levied on a per vehicle basis, a per mile-driven basis, or if it will be some other charge entirely.
All the text does is mandate the creation of a “stakeholder” committee that will be charged with determining the kind and magnitude of fee to be levied and making recommendations upon its disbursement from the Treasury. This won’t occur until November, so currently, it is impossible to conduct a sophisticated cost/benefit analysis.
We are skeptical of 239 nonetheless. There are a number of hidden costs associated with any tax (even if the “fee” isn’t labelled as such) and we hope the stakeholders will take them into account. Especially concerning is the plight of the driver employed by the taxed firms.
The bill is careful to specify that stakeholder recommendations are “subject to the requirement that fees be only imposed upon business entities and not upon individuals using motor vehicles that are owned primarily as personal vehicles and not vehicles used for commercial purposes.” So, it looks like Uber drivers, for instance, are safe. Whatever fees the stakeholders concoct will hit Uber Technologies Inc., not its drivers. And Papa John’s, not the delivery guy, will be footing the bill for your new EV infrastructure.
But this ignores an underlying economic reality: the legal incidence of a tax is not coextensive with its real incidence. That is, the party legally obligated to pay the tax will not necessarily bear most of the cost. The reason for this is that the taxed entity can pass all or some of the tax to other entities with which it contracts. In this case, even though it’s not explicitly stated, the drivers will end up bearing the cost of 239.
Firms will have to either reduce their costs or increase their revenues if they are to remain in operation and in compliance with what the stakeholders decide to implement. Revenue increase will, however, not be a viable option for most. The reason for this is that 239 does not merely tack on a fee – it also allocates the newly expropriated funds to the construction of transportation alternatives. Rideshare platforms, taxis, and rental car agencies already compete with public transportation, as all form part of the transportation industry.
One implication of 239 is that private transportation services may face decreased consumer demand. Consumers using Uber and Lyft today will use public transportation tomorrow since the latter will be expanded by the new law. The decreased demand for private transit implies a decreased price and a decrease in quantity of services sold. In other words, 239 not only reduces revenue by taxing firms; it also does so by entering into competition with them.
And it is unlikely that transportation firms will be able to pass along the costs of the fee to their consumers. The reasoning here is similar to that above. If a rideshare platform like Uber or Lyft (or a taxicab company, or a rental car agency) tries to raise its prices, it is likely that it will lose even more revenue. 239 expands the number of viable substitutes for private transportation services (again, public mass transit is the big one), causing consumers to become more sensitive to price increases.
Right now, it would cost me $10.89 to Uber from the Lakewood-Wadsworth light rail station to Coors Field. If I were to take public transit instead, it would be three dollars. However, using the light rail would take about twice as long – an Uber driver could cover the distance in under 15-minutes and drop me off curbside. Using public mass transit, on the other hand, means I’d be dealing with a 15-minute ride plus a 15-minute walk to the stadium.
After 239 goes into effect, it’s certainly plausible that some consumers who would have otherwise used Uber may decide to ride the less costly light rail.
This problem will only become aggravated for firms that raise their prices. Suppose Uber raises its prices to offset the fee levied by 239. Meanwhile, RTD has become more cost-effective and efficient. Consumers will shiftaway from rideshare and into RTD. The price difference between private and public transit is already enough to buy a hot dog at a Rockies game, and if it continues to widen, at some point, the amount saved by taking public transit will offset the longer travel time.
Economists call sensitivity to price increase, “price elasticity of demand.” When consumer demand is more “elastic,” it is more responsive to changes in the price. An important factor in the determination of elasticity is the number of close substitutes for the good in question. If there are a large number of close substitutes, consumers will be more responsive to price increase. In this case, because 239 both increases the number of substitutes for private transportation and will most likely raise the price for private transportation, marginal consumers will switch to the new, less costly substitute – mass transit.
All this comes at a time when financial analysts have become even more concerned about Uber’s relevancy in the market. Years of heavy losses are starting to add up. Lyft’s outlook isn’t any better. The costs will fall heavily upon the firms, on their employees, and those of us who love ride sharing platforms.
239 taxes transportation firms, decreases demand for their services, and increases the elasticity of private transportation demand. Firms operating in Colorado will bear a financial burden that far exceeds the dollar value of the commercial vehicle fee, and they will not be able to recoup this loss by raising the prices for their services. Instead, they’ll have to cut costs.
Corporations will likely begin by contracting/hiring fewer drivers/employees. After all, they won’t need so many people working for them in the face of reduced demand for their services. Those workers remaining will likely see their wages cut. This is especially the case for rideshare platforms, like Uber and Lyft. These corporations have very low capital costs, because most of their capital (i.e., cars) is not really theirs – the vehicles belong to their independently contracted drivers. While Uber and Lyft don’t have a ton of room to reduce capital expenditure, they can recoup some of their losses from 239 by taking a higher percentage of the ride fee from each driver. Bear in mind, these drivers are already woefully underpaid. Meanwhile, cab drivers who are reeling from rideshare competition will face new hardships from expanded public transportation. In brief, it is the worker, at least as much as the capitalist, who will bear the costs.
In all honesty, we cannot fully determine the magnitude of these costs until the stakeholder group concludes its analysis. We sincerely hope, however, that the stakeholders keep the employees and contractors in mind as it makes its recommendations. Local drivers hold at least as much a stake in this as any bureau, department, environmental activist organization, corporation, policymaker, or Regional Transportation Authority.
To administer regulations without regard to their plight would be a gross miscarriage of justice. Underpaid Uber drivers, the taxicab operators struggling to remain afloat, and the woman who gave you the keys to your rental car will be the ones paying for your electric vehicles and public transportation.
Tegan Truitt is an intern with the Energy and Environmental Policy Center. He is a rising junior at Grove City College, double majoring in economics and philosophy and minoring in math.
Colorado Green New Deal blog series:
Introduction (Blog Post 1), Blog Post 2,Blog Post 3, Blog Post 5, Blog Post 6, Conclusion