The Treasury now stands to take a $49.9 billion hit if oil refiners prevail in their claims that gasoline mixed with butane qualifies as an alternative fuel eligible for a 50 cents per gallon federal tax credit.

The new estimate was revealed in a letter sent Wednesday from Thomas Barthold, chief of staff to the Joint Committee on Taxation, to attorneys for the House Ways and Means and Senate Finance committees.

Both panels have been busy trying to shut down the butane mixture credit, even as they seek to extend the underlying alternative fuels credit, but their efforts to move a tax extenders package have stalled because of unrelated disputes. Barthold’s letter could give the effort added urgency, however, given the huge potential revenue loss.

The JCT has been working with the IRS to determine the scope of the problem, Barthold wrote, and found that taxpayers could be on the hook for tax refunds related to claims filed by 45 unnamed filers, some of which have the same parent company, for tax years 2013 through 2017.

[House Democrats feeling heat on SALT rollback]

In early 2018, the IRS ruled that butane and gasoline mixtures shouldn’t qualify for the alternative fuels credit since that wasn’t the intent of lawmakers when they created the tax credit as part of the 2005 highway bill  to promote renewable fuels.

“Every gallon of gasoline sold in the United States contains butane,” IRS attorneys wrote, noting that butane occurs naturally in the gasoline refining process. It’s also added to boost octane and help engines run more smoothly in cold weather.

Nonetheless, several companies — including Valero Energy Corp., one of the nation’s largest oil refiners — filed suit against the IRS, arguing they were following the law and the intent of Congress. In Valero’s complaint, the San Antonio-based company’s lawyers argue that the term “alternative fuel” for tax credit purposes includes “liquefied petroleum gas,” which includes butane as well as propane.

The U.S. government has moved to dismiss the cases, which are still pending in federal court.

[Oil refiners racing Congress to protect butane loophole]

The butane-related claims caught the eye of tax writers in both chambers late last year when the GOP-controlled House Ways and Means Committee released an extenders package including a one-year renewal of the alternative fuels credit that the JCT said would cost $7.1 billion. That was more than 10 times higher than the previous extension through 2018, which was estimated to cost $555 million.

When the Democrat-controlled Ways and Means panel introduced its extenders bill this past June, the JCT estimated the cost to renew the provision for three years at just $2.2 billion, or a little more than $700 million per year, after the prohibition on butane-related claims was written in. The Senate Finance Committee introduced a similar package earlier in the year.

Under the committees’ proposals, any claims that hadn’t been approved as of the date of the bill’s enactment would be shut down. That essentially created a race to litigate, as companies sought to secure their alternative fuels credits before Congress acted.

‘Very productive’ discussion

Since then, the tax extenders effort has bogged down in various disputes over what provisions should be included and whether offsets are necessary. Senate Finance Chairman Charles E. Grassley, an Iowa Republican, said Thursday that he met the previous day with Democratic House Ways and Means Chairman Richard E. Neal of Massachusetts to discuss tax extenders. Grassley said he believes the two can strike a deal but declined to give specifics.

Grassley described his meeting with Neal as “very productive” and said he would signal Senate negotiators, who have been in talks with Neal’s staff for more than a month, to “embolden them to be more aggressive and to reach an agreement.”

Earlier this year, the IRS provided the tax-writing panels first with an estimate that the cost had risen to $10 billion to satisfy butane-related claims, later upping that figure to $18 billion. The JCT’s findings indicate that companies seeking to take advantage of lawmakers’ inaction have been busy since the summer.

In June, when Ways and Means passed the tax extenders bill, Oregon Rep. Earl Blumenauer, a Democrat, argued that the alternative fuels credit was created to incentivize renewable fuels. He said refiners know the “loophole” they just recently discovered is “contrary to the intent of the law.”

But Ways and Means ranking member Kevin Brady of Texas had argued that retroactively barring butane claims was “unconstitutional and will invite legal challenge.” Asked Thursday about the new $49.9 billion estimate, Brady said the principle remained the same and that he still opposes retroactively barring the IRS from making the butane-related payments.

Americans for Tax Reform President Grover Norquist wrote to Senate Finance members this summer urging them to reconsider the retroactive prohibition. He wrote that any change should only be applied prospectively, calling the provision as drafted “unsound tax policy that denies due process for taxpayers that followed a reasonable interpretation of the law and supersedes ongoing litigation.”

The new definitions in the House and Senate bills would not only remove butane from being considered an alternative fuel but would impact other fuels as well, including propane.

Minnesota-based CHS Inc., a cooperative owned by 70,000 farmers and more than 1,000 independent cooperatives, complains that before the alternative fuel credit expired at the end of 2017, it successfully received the credit in both 2016 and 2017. CHS received the credit based on its use of propane, which it blends with butane at its Kansas and North Dakota facilities.

“Substantial investments” were made in those blending facilities based on opinions from two tax counsels who told CHS that propane would qualify for the credit, the company wrote in a letter sent to the Senate Finance energy tax task force. Company officials also wrote that proceeds from the tax credit have been used to “encourage expansion of propane transportation infrastructure,” arguing that propane is a cleaner-burning fuel currently in use by law enforcement and local school districts in their bus fleets.