Since the interest on T-Bills is state tax free, it seems odd that ETFs like BIL that only contain T-Bills require you to pay state taxes on the monthly distributions. Thoughts why that is so?
I expect it is the same for a Money Market Fund that only invests in government debit. We offer customers access to the Vanguard Treasury Money Market Fund VUSXX. I found this when I did a Generative AI search. "Interest from Treasury bills (T-bills) is exempt from state and local taxes, but subject to federal income taxes. You can report interest income from T-bills on your federal tax return, but you won't have to pay state or local taxes on it. Interest from taxable money market funds and Treasury bills is considered "ordinary income" and is subject to federal and state income taxes." I expect the difference is who owns the debt. If you buy the T-bill, you own it. If an ETF or Money Market Fund buys it, they do. This is not professional Tax advice. Consulting your tax advisor about this.
"Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes. Municipal bond income is also usually free from state tax in the state where the bond was issued." - Vanguard "Interest payments from corporate bond ETFs are taxed as ordinary income. Most muni bonds are free from federal income tax; they're often also tax-free to residents of the issuing state and/or city. So interest payments from a muni bond ETF are exempt at the federal level." - ETF.com