In 1982 congress passes TEFRA, the tax equity and fiscal responsibility act, this statute took away the federal income tax exemption for interest earned on publicly offered long-term bonds issued by state and local governments unless they were issued in registered form. South Carolina argued that bearer and registered bonds issued by states and municipalities have been free from taxation since Pollock v. Farmers Loan and Trust co. Meanwhile the Federal Government said TEFRA didn’t take away the state’s power to issue bonds free from taxation but to regulate the types of bonds to be exempt.
The issue behind the case is whether the TEFRA was in violation of the tenth Amendment and Intergovernmental tax immunity.
The court held for one, In Section 310(b)(1) does not violate the Tenth Amendment or constitutional principles of federalism by effectively compelling States to issue bonds in registered form. Pp. 485 U. S. 511-515. Two, Section 310(b)(1) does not violate the doctrine of intergovernmental tax immunity by taxing the interest earned on unregistered state bonds. Section 310(b)(1) is inconsistent with this Court’s holding in Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429, that state bond interest was immune from a nondiscriminatory federal tax, but that decision has been effectively overruled by subsequent case law.
This subsequent decision overruled Pollock v Farmers Loan and Trust co so state bond interest is not immune from nondiscriminatory federal tax, resulting in the owners of state bonds to have no constitutional authority to exempt taxes on earned income.