The Steward Machine Co. v. Davis case in 1936 revolved around the constitutionality of a tax imposed on employers under the Social Security Act of 1935, which was challenged by Steward Machine Company. The company argued that this act invaded areas reserved to state power and therefore violated the Tenth Amendment, as well as asserting it was an improper delegation of Congressional authority over taxation. However, the Supreme Court upheld the validity of this tax with a majority decision (5-4). It ruled that Congress had not exceeded its powers under Article I Section 8 Clause 1 ("the Taxing and Spending Clause") or violated any other provisions within Constitution through imposing such taxes for welfare purposes like unemployment compensation funds. This ruling affirmed federal government's right to encourage policy at state level via fiscal means without infringing upon states' rights.

In the dissenting opinion for Steward Machine Co. v. Davis, Justice McReynolds argued that the Social Security Act was unconstitutional because it coerced states into surrendering their sovereignty to the federal government. He believed that by imposing a tax on employers and then offering to return those funds if states complied with certain conditions, Congress was effectively forcing states to adopt unemployment compensation laws against their will. This, he contended, violated principles of federalism and exceeded Congress's power under the Taxing Clause of the Constitution. Furthermore, he asserted that this kind of conditional spending could potentially allow Congress to control any area of state policy simply by attaching conditions to funding - an outcome he viewed as dangerous and contrary to constitutional design.