Can you reference tax code that says this income is subject to state income tax? To me, any income generated on treasury instruments should not be taxable by the states. Many, many Treasury bonds are sold on the secondary market at a discount to par. If you are saying that states can tax the income that accrues when the bonds reach par, that really hurts the attractiveness of the bonds. The Fed does not want the state to tax this income because they do not want these to be less attractive investments.
