In the case of South Carolina v. Baker, Secretary of the Treasury in 1987, the U.S. Supreme Court ruled that a federal tax on interest earned from state and local bonds was constitutional. The State of South Carolina challenged this law arguing it violated intergovernmental tax immunity by directly taxing states' borrowing ability and also infringed upon their sovereignty under the Tenth Amendment to the Constitution. However, Justice William Brennan delivered an opinion for a unanimous court stating that there was no violation as long as taxes did not discriminate against states or those working with them; thus upholding Congress's power to levy such taxes under its broad authority granted by Article I Section 8 of Constitution which allows Congress "to lay and collect Taxes." This ruling effectively overruled Pollock v Farmers’ Loan & Trust Co., thereby allowing federal taxation on income from any source without apportionment among States.

In the dissenting opinion for South Carolina v. Baker, Justice O'Connor, joined by Chief Justice Rehnquist and Justices White and Powell, argued that the majority's decision to uphold a federal tax on interest earned from state-issued bonds was inconsistent with previous court rulings and violated principles of federalism. The dissenters contended that this case should have been controlled by Pollock v. Farmers' Loan & Trust Co., which held income taxes on interest from municipal bonds unconstitutional under the direct-tax clauses of the Constitution. They also believed that Congress did not possess unlimited power to tax states or their instrumentalities without violating constitutional principles of intergovernmental immunity; thus they saw this as an intrusion into state sovereignty. Furthermore, they disagreed with how lightly the majority dismissed these concerns about federal encroachment upon traditional areas of state authority.