It is asking for what states owned the bonds that generated the interest reported in box 8 of the 1099-INT.
1) IF all the interest reported in box 8 was from MI-Issued bonds, you can enter "MI".
2) IF all the interest reported in box 8 was from bonds issued by a variety of states, you can select "More than one state" from the end of the list of states (or use "XX" if you are in error check screen).
3) IF all the interest reported in box 8 was from bonds issued by mostly MI, but also some other states, you can break out the portion from MI, and the other states into separate lots in the interview....but selection "More than one state" is simpler if the box 8 $$ total isn't very large.
____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*