Are you saying that you believe that pension distribution from an Arizona state pension are not taxable in Arizona?
The Arizona Instructions say:
"Line 29a - Exclusion for U.S. Government, Arizona State or Local Government Pensions
If you received pension income from any of the sources listed
below, subtract the amount you received or $2,500, whichever
is less. Include only the amount you reported as income on your
federal return. If both you and your spouse receive such pension
income, each spouse may subtract the amount received or
$2,500, whichever is less."
This says that only $2,500 of the pension distributions are subtracted from Arizona income, not all of it.
In the Arizona interview, you should see a screen with the heading, "Government Pension Deduction Summary".
This screen will have a line that reads "Federal and Arizona government pension deduction". This is not saying that your Arizona State pension is a federal pension, but that state pensions are treated the same way as federal pensions.
Does this cover what you are asking, or are you asking something else?
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