An individual who retires in a state with high income taxes may invest in Treasury bonds to eliminate state tax on income from the interest. Though the income is taxed at the federal level, it would not be subject to the state tax. General Obligation (GO) Bonds: These are the most common type of municipal bond. GO bonds involve the full faith and credit of the issuing government entity whether it be a city or a state. Since the issue of the GO bonds is backed by its ability to raise taxes to retire the debt, the debtor can theoretically impose taxes to ensure repayment on the bond. A city might try to float a GO bond issue to finance the building of a new public library. The interest income from GO bonds is generally exempt from federal income tax.