In the 1898 case of McCulloch v. Virginia, the U.S Supreme Court was tasked with determining whether Congress had the authority to establish a national bank and if individual states could tax that institution. The state of Maryland imposed a significant tax on all banks not chartered by the state, which included the Second Bank of United States - an institution created by Congress in 1816. When James W. McCulloch, head cashier at Baltimore's branch refused to pay this tax, he was sued by Maryland. The court ruled in favor of McCulloch stating that while Constitution does not explicitly provide for creation or regulation of federal banks; it is implied under Necessary and Proper Clause (Article I Section 8). This clause allows Congress to pass laws necessary for executing its enumerated powers such as regulating commerce and collecting taxes. Furthermore, they held that states cannot interfere with or control federal institutions within their boundaries through taxation or otherwise due to Supremacy Clause (Article VI), which establishes Federal law as supreme over State law when there is conflict between two. This landmark decision reinforced principle of federal supremacy over states while also expanding scope for Congressional power via liberal interpretation of Necessary & Proper clause.

In the dissenting opinion for McCullough v. Virginia, the justice argued that states should have the power to tax federal entities within their borders as a means of maintaining balance between state and federal powers. The justice contended that exempting federally chartered institutions from state taxation could lead to an imbalance in favor of federal authority, undermining principles of dual sovereignty inherent in American constitutional design. They also expressed concern about potential abuses if such institutions were allowed unchecked growth without any form of local control or oversight through taxation. Furthermore, they disagreed with majority's interpretation of "necessary and proper" clause which was used to justify this exemption; arguing instead for a more restrictive reading that would limit Congress' implied powers under this provision.