Which type of security is exempt from state taxes?

Treasury notes are exempt from state taxes, which is a key reason why many investors find them attractive. These government-issued securities are backed by the full faith and credit of the U.S. government, providing a high level of security and stability. Because they are federal securities, any interest earned from Treasury notes is not subject to taxation by state or local authorities, although it is still subject to federal taxation.

In contrast, other options typically do not offer the same tax benefits at the state level. Municipal bonds, for instance, are usually exempt from federal taxes, and potentially from state taxes if issued within the investor's state, but this reliance on state-specific laws means not all of them are universally exempt. Corporate bonds are subject to both federal and state taxes, and municipal notes, similar to bonds, may carry specific tax implications depending on local regulations. Thus, the unique status of Treasury notes regarding state tax exemption differentiates them from the other securities.