An agreement between federal and state and local taxing authorities mandating mutual exclusion in taxation of interest. The interest paid on any security issued by the federal government is not taxable at the state or local level. Conversely, any debt issued by state or local municipalities is free from federal taxation as well. 



|||This reciprocal agreement has been in place for decades. For this reason, high income taxpayers seek municipal issues for federal tax relief. The freedom from state and local taxes also makes interest from governmental issues more palatable for conservative investors living on fixed incomes.