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As news of Iowa’s filmmakers’ tax credit debacle makes national headlines, a debate is heating up over how, why and whether tax breaks should be used to spur economic growth in the state.

Proponents of federal and state tax credits believe the incentives are necessary to promote economic development and create jobs. But some opponents of the programs counter that the credits benefit only a handful of well-connected players, and that a general lack of oversight makes it nearly impossible to tell just how much bang the state is getting for its bucks.

A local developer, a certified public accountant and an Iowa lawmaker sat down in separate interviews with the Business Record last week to discuss their views on tax credits.

“It’s the classic example,” said Joe Kristan, tax technical director for Roth & Co. P.C. “There are a few people that are making a lot of money on (tax credits) by taking a little bit of money out of everyone’s pockets.”

Kristan, a certified public accountant (CPA) who focuses on real estate, manufacturing companies, closely held businesses and foreign-owned companies’ U.S. operations, doesn’t mince words when describing his position.

“The idea that the state legislature is the right place to decide where the future of Iowa’s economy lies is really pretty ludicrous,” he said. “The state isn’t smart enough or fast enough to make those kinds of decisions. It’s lobbyists getting together and convincing enough legislators that you should have these benefits.”

Kristan said he doesn’t fault businesses that are eligible for the tax credits for taking them. “They look at it as a self-help mechanism,” he said. “But from a policy standpoint, it’s hard to say that’s good for the state.”

Jim Conlin, president and CEO of Conlin Properties Inc., a development and property management company, has a different take.

“Tax incentives have stimulated development for a hundred years,” Conlin said. “Our political leaders want to encourage economic activity in various areas and they do that through tax legislation. That’s going to continue, and it has to continue to promote the common good.”

Conlin Properties, which owns and manages about 6,500 market-rate apartments and about 2,500 affordable-housing units in Iowa, has been awarded millions of dollars worth of low-income housing tax credits (LIHTCs) since the inception of the federal Housing Tax Credit program in 1986.

The credits, which are administered and regulated though the Iowa Finance Authority (IFA), are intended to encourage the development of affordable rental housing for individuals and families with fixed or limited incomes.

Developers of affordable housing, hoping to generate equity for their projects, attempt to sell the credits to investors, such as large financial institutions and insurance companies, that want to offset their taxable income.

The first phase of Conlin’s most recent affordable-housing project, Chapel Ridge West, is nearly complete. The 175-unit complex, located at the intersection of 41st Street and E.P. True Parkway in West Des Moines, was awarded $6,188,110 in LIHTCs, which are allocated in 10 annual installments. Midwest Housing Equity Group, an Omaha-based tax-credit syndicator, paid 89 cents on the dollar for the credits, providing more than $5.5 million in equity for the development.

Kris Saddoris, a Conlin Properties vice president, said the only way to make affordable-housing projects viable, given that rents in those projects are capped at a certain amount, is to reduce the amount of debt incurred.

“You could never charge the type of rents that you’re charging for that program and service the debt,” Saddoris said, adding that if you look at a market-rate project and an affordable-housing project side by side, the costs are identical. “It’s just really pure economics,” she said. “The only way to charge that type of rent is to reduce the debt. That’s what those credits are designed to do.”

Chapel Ridge’s second phase, expected to commence this spring, has been awarded more than $11 million in LIHTCs, as well as $4 million in Section 1602 funds. Section 1602 is a U.S. Treasury Department program that allows the IFA to exchange a portion of its tax credits for cash grants, which are in turn allocated to projects in lieu of loans.

Monthly rents at Chapel Ridge will range from $486 to $700.

Though Kristan doesn’t necessarily disagree with the need for more affordable housing in Iowa, he believes the number of projects subsidized by tax incentives is contributing to an overabundance of housing in general, making it more difficult for unsubsidized projects to attract and retain tenants.

From his perspective, there are governmental programs being implemented to increase supply, which brings housing prices down, while other initiatives are intended to prop up housing prices.

“The government is driving with its foot on both the gas and the brakes,” he said.

With that in mind, Kristan said tax credits tend to “take on a life of their own, whether the market supports them or not,” especially considering the “countervailing political forces” at work.

Rep. Bruce Hunter, D-Des Moines, an outspoken critic of tax credits, said he is not opposed to all of the incentives, but believes there needs to be more legislation and benchmarks governing their use.

“As we write these bills in the future,” Hunter said, “we’ve got to, I think, be very specific in what we expect for our money,” such as exactly how many jobs will be created by any given incentive.

He also thinks the bills need to more accurately reflect the state’s priorities, whether that is increasing teacher pay, keeping highway patrolmen on the street, trimming tuition costs or supporting housing initiatives.

“I think we still need to look at tax credits in the overall budget stance,” he said, adding that recent cuts to the state budget make it even more important to look at everything as a whole. Hunter was the only member of the Iowa House of Representatives who voted “no” on a bill passed in April to approve Iowa’s film tax credits. Approximately $32 million of those credits were issued before Gov. Chet Culver last month suspended the program, which is under criminal investigation by the state attorney general’s office.

“Tax credits in Iowa aren’t generally very transparent, and there isn’t a good sense of how many of our tax expenditures are doing what they were intended to do,” said Mike Owen, communications director for the Iowa Fiscal Partnership, a bipartisan watchdog group that scrutinizes the state’s budget and tax policies.

Carla Pope, the IFA’s affordable rental production director, said she knows that “there are some problems with tax credits in and out of the state,” adding that her organization takes “very seriously” the responsibility of administering LIHTCs and the Disaster Recovery Housing Project Tax Credit program.

“It takes a lot of oversight,” she said. “We have very specific underwriting standards that must be met.”

Prior to being awarded the credits, a developer must demonstrate to the IFA through a lengthy application process that a project has market demand, is financially feasible, meets construction standards and is committed to serving low-income people, Pope said.

The developer must also show that other funding sources, including an investor or tax credit syndicator and a lender, have initially committed to the project.

“Believe me, I have a ton of policies and procedures that we must follow,” Pope said, adding that the IFA’s underwriters go through all of the financials with a “fine-tooth comb.” At the end of the construction period, Pope said, a financial audit performed by a CPA confirms to her agency that the costs incurred were legitimate to that project.

Then, the IFA’s compliance department takes over, generating an annual report on the project and physically inspecting the property every other year for 15 years.

“There are people who will take advantage of the system,” but that in itself doesn’t mean the system is wrong, Conlin said. “Whatever the system is, people with bad moral character are going to find a way around it.

“After the film industry incident,” he continued, “I understand that tax credits are being looked at throughout the state. In order to get us back on track, everything has to be looked at.”

“Let the bankers and investors sort out which (businesses and projects) are worth funding,” Kristan said.

“From my perspective,” Pope said, “I am protecting the federal taxpayer.”