I had the same issue. Turbo Tax was not deducting the Goverment Bond interest from my state taxable income. But then I realized I'd entered it as interest in Box 1 on the 1099-INT and not Box 3. So I corrected it and moved it to Box 3. Unfortunately Turbo Tax did not recognize the change and it was still taxable. I had to delete the 1099 AND the state tax return (https://ttlc.intuit.com/community/state-taxes/help/how-do-i-clear-my-state-return-in-the-turbotax-fo...) and then re-enter the 1099-INT using Box 3 and then start the state return from scratch. Then it correctly deducted it. Not sure if this is the situation you are experiencing, but this is how I got it to work! Now I see the deduction correctly as shown in the previous example shown.
