Which of the following represents an example of income that is not subject to state taxation in California?

Interest on California Municipal Bonds is not subject to state taxation in California. This is because California statutes specifically exempt interest earned on bonds issued by the state or its municipalities from being taxable by the state. The rationale behind this exemption is to encourage investment in local government projects and public infrastructure. By providing a tax incentive, the state aims to attract investors, thereby fostering economic growth and supporting community development.

In comparison, interest on federal bonds, wages from California employment, and dividends from California corporations are all subject to state taxation. Federal bonds are generally taxable at the state level, wages earned in California are part of the income subject to state income tax, and dividends from California corporations are also included in the taxable income for state purposes. This distinction highlights the unique treatment that California gives to certain types of income as a means of promoting local investment and growth.