Despite strong headwinds, Uber won't be taxed out of business

Despite strong headwinds, Uber won't be taxed out of business

Ride-sharing companies Uber and Lyft are having a terrible, horrible, no-good, very bad year on Wall Street following their initial public offerings. 

As of early December, Uber’s stock price has dropped from $45 per share to below $30; the market capitalization fell from $75 billion to below $50 billion. Lyft, its smaller competitor, saw its stock price fall from $72 per share to approximately $45, witnessing half of its market cap evaporate ($24 billion to about $13 billion). These downward-trending stock performances have led to vibrant analysis over the last few weeks regarding whether the stocks have “bottomed out” or remain speculative investments

Besides the thought-provoking headlines about stock prices, the ride-sharing companies are also having a rough year with tax authorities and regulators, so much so that some might think Uber won't survive.

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It is no secret that Uber and Lyft have been fighting to maintain the independent contractor status of their drivers since the inception. Uber secured a win at the federal level in April when the National Labor Relations Board classified its drivers as independent contractorsreversing the specification made during the Obama administration that food delivery service Postmates’ drivers were employees. The immediate implication of the NLRB’s decision is that, from a federal perspective, workers in the sharing economy are not entitled to workplace organizing activities such as forming a union; they are also unlikely to receive federal minimum wage and overtime pay protections. 

Despite drivers’ federal defeat, the primary battleground for worker classification remains at the state level, where they've had victories. In September, California Gov. Gavin NewsomGavin Christopher NewsomGun sellers listed as 'critical' infrastructure California governor: 170 ventilators sent from Trump administration were 'not working' Texas AG says gun stores are essential, should remain open amid pandemic MORE signed into law Assembly Bill 5, which  essentially tightens the criteria of classifying workers as independent contractors and implies that Uber and Lyft drivers are employees.

In response, the ride-sharing companies started a state ballot initiative for November 2020: They want voters to support preserving the flexibility offered by the independent contractor status but provide access to benefit packages including guaranteed minimum earnings, health care subsidies, occupational/accident insurance, and discrimination and harassment protection.

A preliminary estimate indicated that hiring workers as employees instead of as independent contractors would cost 20 percent to 30 percent more; the fact that Uber and Lyft are willing to trade offering a minimum wage, health care and occupational insurance for contractor classification indicates these benefits collectively cost less than 20 percent of the bottom line. Maintaining the independent contractor status in California also avoids the ripple effect of unfavorable labor classification spreading to other state legislatures.

Drivers' classification also has significant tax consequences. Last month, New Jersey imposed a $640 million tax-related charge on Uber, indicating the company misclassified its drivers as independent contractors when they should be employees. The state is therefore clawing back Uber’s unpaid unemployment and disability insurance benefit taxes that typically would have been paid for employees (in this case, $523 million in taxes and $119 million in interest and penalties).

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In New York City, after a limit on new permits for ride-sharing drivers was imposed in summer 2018, rules governing driver minimum wage and congestion charges were adopted. Drivers applauded the minimum wage law; however, a small New York-based ride sharing company, Juno, declared bankruptcy in November of this year, and its executives blamed the new law and lawsuits from drivers seeking employee status.

Several cities adopted measures similar to those in New York this year. Seattle's city council approved the “Fare Share Plan,” which guaranteed drivers the city’s minimum wage, certain benefits and a dispute-resolution mechanism. From the congestion tax perspective, Chicago's city council voted to include ride-sharing companies in its ground transportation tax to alleviate congestion and reduce the city’s budget deficit. San Francisco voters narrowly approved a congestion tax on ride-sharing companies.

Uber and Lyft were backing these congestion tax initiatives; anecdotal evidence suggests they prefer these levies to restrictions on the number of vehicles or permits issued, or other measures such as classifying workers as employees.

Sharing-economy companies have adversarial relationships with government regulators in their inaugural years; however, as those companies grow, they tend to evolve and become less combative. For regulators, it is crucial to strike a balance between preserving innovation and holding companies accountable in a socially responsible way. If the sharing economy represents the future of work and the society collectively recognizes that workers warrant a livable wage, lawmakers need to jump in and clarify the worker status.

To settle the issue, several options can be viable starting points for discussion. For instance, Congress can expand the current rules of classifying workers as employees or contractors to consider sharing economy workers explicitly. Alternatively, it can also create a separate “dependent contractor” or “dependent worker” status with certain protections and benefits attached. The latter could potentially be beneficial to the ride-sharing companies — gaining legal clarity on what wage and benefits the companies need to provide prevents individual states from requesting full benefits applicable to employees. Finally, based on Congressional clarification, tax authorities could also issue guidance to simplify the current compliance process and encourage withholding.

I don't think Uber will be taxed out of business. Tax is a heavy headwind, but not the last straw. Uber remains a highly innovative company that seeks to diversify and expand. From a public policy perspective, regulators are closing in on Uber’s disruptive style of business, eyeing not only the tax revenue but also reining in a new, still-evolving business model. It is a learning process for both the regulators and the companies.

Joyce Beebe is an economist and fellow in public finance at Rice University’s Baker Institute for Public Policy.