A majority of the Senate (including two Democrats) has agreed to forego efforts to eliminate the filibuster during the Congressional term ending December 2022.

The filibuster is a rule that requires sixty votes -- and thus some minority support -- to pass most legislation in the Senate. The filibuster is a Senate procedural rule. It is not enshrined in the Constitution or any law. Although the filibuster requires sixty votes to move legislation, only a simple majority of the Senate (51 votes) is needed to eliminate the filibuster requirement. (This difference defies rational explanation.)

The recent decision to retain the filibuster permits the Republicans to block most of President Biden’s sweeping legislative initiatives, such as adding a public option to the ACA, tightening Dodd-Frank, providing green energy incentives, reforming Social Security, and forgiving student loans. Because many of these initiatives are anti-business, the markets may breathe a sigh of relief that the filibuster remains intact.

Senate rules, however, provide an important exception to the filibuster, called “reconciliation”. Reconciliation is complicated, but the bottom line is that the procedure allows the Senate to pass tax legislation and most spending legislation with a simple majority vote.

For the markets, the reconciliation procedure is a mixed blessing. In the short term, reconciliation allows the Democrats to pass COVID stimulus legislation unilaterally if they cannot agree with the Republicans on a bipartisan package. But, later this year, reconciliation gives the Democrats the wherewithal to pass Biden’s tax proposals over Republican objection. That ability notwithstanding, we expect Senate Democrats to make substantial changes to Biden’s tax package before its potential enactment.