In the case of South Carolina v. Regan, Secretary of Treasury in 1983, the state of South Carolina challenged a federal law that eliminated tax-exempt status for bonds issued by states if they were not registered with the Internal Revenue Service (IRS). The Supreme Court ruled in favor of the Federal Government stating that Congress had acted within its powers to regulate interstate commerce and manage public debt. The court also noted that there was no violation against intergovernmental tax immunity because other methods for issuing debt remained available to states without triggering federal taxation. This decision reinforced Congressional authority over fiscal policy and upheld their right to impose conditions on tax exemptions.

In the dissenting opinion for South Carolina v. Regan, Justice O'Connor argued that the majority's decision was inconsistent with both precedent and principles of federalism. She contended that the Court had previously recognized a State's right to challenge federal tax laws when they interfere with its sovereign interests, and this case should be no exception. The new law effectively eliminated South Carolina’s ability to issue bearer bonds without incurring significant financial penalties - an action she viewed as a direct infringement on state sovereignty. Furthermore, she disagreed with the majority's assertion that South Carolina had an adequate legal remedy available through third-party suits by bondholders; such indirect methods were not sufficient or appropriate substitutes for direct judicial review of constitutional issues involving state-federal relations.