Many of us in California have different types of investments, some of which are designed to minimize our tax liability. One of those is a tax-exempt bond. According to the Small Business Administration tax-exempt bonds are basically loans to a private business that are issued by the state or a local government. They are then re-sold on the open market. Interest income earned by the new bond owner, is exempt from state and local taxes, so the lender can pass those savings along in terms of lower interest rates.