Part 1: The Shadow Market (See Part 2 below) | Video Credit: Nicholas McVicker
By Amita Sharma
Fred, who is short, 40ish and East African, makes a lot of money in the taxi business in San Diego. And it’s not just from driving a cab.
He’s exploited what Mayor Bob Filner calls the “black market” in taxi permits: buying and selling these coveted licenses several times over. He said he’s made tens of thousands of dollars over the past 10 years from would-be drivers, mostly from immigrants like himself.
“Sometimes, you buy $90,000, you sell it in one month and extra $40,000 profit you make,” Fred said. “I made a lot of money. I didn’t pay tax.”
Fred refused to be quoted by his full name because he fears retaliation by cab companies and other drivers, but he said he feels bad about taking advantage of people who want to get into the business.
“I was doing wrong,” Fred said. “I realize that. The system is wrong. The system has allowed us to do it.”
Local taxi industry insiders say Fred’s story is just one example of a pervasive problem: cab permits are being used to exploit drivers, consumers and even taxpayers. Many say the underground permit sales for up to six figures each are driving up passenger fares and forcing drivers to work perilously long hours for barely-livable wages.
Transportation agency and other government officials are aware of the shadow market, and there doesn’t appear to be a law against the private exchanges. But there are questions about whether these sales violate tax laws because sellers don’t pay sales tax on their transactions.
Story continues below.
Part 2: Taxi Regulation | Video Credit: Nicholas McVicker
California Franchise Tax Board spokeswoman Denise Azimi says the state views the gain on the sale of an intangible business asset like a license as taxable. Finding documentation of the transaction would be a problem.
Drivers said the exchanges are all cash.
The taxi permitting is run by Metropolitan Transit System (MTS), the agency that runs the buses and trolleys in San Diego. Some, like Filner, believe the problems could be cleaned up if the permitting process was taken over by the city.
The city is exploring whether to assume control of regulation after receiving scores of complaints from drivers and passengers about the way MTS has run the system.
“I think it’s been lax. That’s why we’re going to take it over,” Filner said. “They’ve allowed this whole black market situation to develop without any oversight.”
Public property, private sales
Taxi permits are considered public property. Officially, they change hands from a seller to a buyer for a $3,000 fee to MTS through what’s known as a transfer. But drivers say the big money changes hands privately.
“Once MTS says ‘OK, we’ll transfer it,’ then all the money dealing is done with a handshake and a backroom,” said lawyer Bob Glaser, who represents a group of cab drivers who want to reform the system. “Where the people get the money to buy the license, where they borrow it from, how they earn it, that’s all off the record. Nobody knows.”
There are a limited number of taxi permits in the county. In the city of San Diego, 993 permits are held by 418 individuals and cab company owners, according to MTS. There are 1,850 licensed cab drivers. Since 1989, 125 new permits have been issued, according to agency documents.
An inewsource analysis of MTS data shows between March of 2009 and April of this year, there were 326 transfers, or about one-third of the total permits. About 83 percent of the permits that transferred changed hands once. Nearly 17 percent were transferred twice.
There is disagreement about whether limiting the number of taxi permits is good or bad. Some say the limited number fuels the private market. But others say unlimited permits would flood the market and create greater hardship for drivers searching for fares.
Industry insiders say poor working conditions, high cab fares and the black market are all illustrative of what industry insiders said are a shortage of permits in San Diego.
MTS is aware of the private sale of taxi permits. A consultant hired by MTS in 2010 concluded that “profit-taking has occurred on a grand scale in San Diego’s taxi market.”
The report acknowledges that MTS has the authority to stop the practice and require that permits be surrendered to the agency and re-issued through a process with more governmental control.
KPBS attempted to ask MTS why it permits the transfers, but the MTS spokesman refused to grant a recorded interview. In an email, spokesman Rob Schupp said “our board has not considered the specific issue of permit transfers and therefore, has no position on the subject.”
In the 2010 study, the MTS consultant wrote that the sale of these permits encourages taxicab owners to invest in their businesses and cars. The report also credits such transactions with creating an opening for newcomers into the taxi business.
It concluded that “there is no compelling public interest that would be served by disallowing permit transfers.”
Cab driver lawyer Glaser said the reverse is true. It’s consumers and cab workers who are suffering because of the high cost of taxi permits, he said.
“If a driver has to pay $150,000 just to get in the business, well they’re going to keep their rates just as high as they possibly can.”
San Diego has among the highest cab fares in the country, according to a 2012 Washington Post survey of 40 U.S. cities.
High cost of leasing
Some cab drivers say the high cost of permits on the private market forces some cabbies to lease permits rather than buy one. And leases are also expensive.
Bob is an East African immigrant, who leases one of six permits owned by a man in East County. Bob would not allow his name to be used because he says the permit owner will fire him if he speaks publicly about their financial arrangement.
He said he paid $7,000 up front to enter the agreement. And each month, he pays $1,200 to lease the permit. He said he spends another $650 on gas and insurance. There are some months, he said, when he only brings home $1,000, despite working 12 hours a day, seven days a week.
The married father of two children holds a second job as a technician.
“You have no option,” Bob said. “Jobs are limited. You have to work. You can’t take a day off. No medical benefits. You can’t save anything. Rent is going up.”
A recent study by San Diego State University and the Center on Policy Initiatives, a nonprofit institute that advocates for workers, found that nearly 90 percent of taxi drivers in the city lease permits from individuals or taxi companies. The study showed drivers earn a median wage of $4.45 an hour including tips. In fact, they would have to work more than 70 hours a week to earn the equivalent of a minimum wage worker during a 40-hour a week.
Alfredo Hueso, a partial owner of USA Cab in San Diego, says the study is overly broad. He believes taxi drivers make significantly above minimum wage and they have been wrongly painted as victims.
“They’re the ones that chose the profession,” Hueso said. “Nobody forces them into bondage.”
Hueso worries that if regulation transfers to the city, there may be too many taxi permits in circulation and not enough work for drivers.
Filner says he’s aware of that concern.
“Most cities have found a balance between the permit numbers,” Filner said. “You need access for the public and you need to assure the drivers that they can make a living. That’s not easy to work out. But that’s what we’re going to be talking about in the next six months.”
Glaser said he’d like to see San Diego’s taxi industry patterned after cities like San Francisco. A San Francisco city agency is trying out a program for buying and selling taxi medallions.
“Why doesn’t MTS create a transparent system,” Glaser asked. “There’d be no need to sublease if everybody got a license. There’d be no need to buy or sell licenses on the black market if everybody got a license.”
San Diego City Councilwoman Marti Emerald once headed MTS’s taxi advisory committee, which sets policy. She said she’s concerned about the taxi permit sales, but she’s cautious about how she characterizes the deals.
“I don’t believe they’re breaking the law,” she said.
A former taxi driver herself, Emerald believes city oversight would be an improvement.
“If we bring it back the right way,” she said, “I think we can do a better job of protecting the drivers and the public.”
inewsource data analyst Ryann Grochowski and Speak City Heights reporter Megan Burks contributed to this report.