How is Savings Bond interest taxed?

Is interest on Savings Bonds taxed at dividend rates or ordinary income rates? Do you pay state tax on US government bonds?

Tom's response

Savings Bonds pay interest income that is taxed at ordinary tax rates.

States aren't allowed to collect income tax on Federal interest payments, including Savings Bond interest, but you need to make sure you take the deduction on your state taxes. It's not automatic.

My book has detailed information on how to complete your state tax return so that you get the deduction.