Accrued Market interest isn't excludable at the state level. This is because the interest isn't paid directly by the issue agency to the taxpayer.
In order for interest paid to qualify for exclusion of tax by a state, it must generally be interest of a direct government obligation. Accrued market discount doesn't meet this definition as it isn't the direct (or "coupon") interest.
Unfortunately, there isn't a single consolidated link or citation that we can provide here as each state has different mechanisms for showing this ranging from court cases, codification into law, or state agency declarations.
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