If you receive a refund on state income taxes that includes interest the interest is nontaxable if the refund is not taxable?

First, a refund of State Income Tax, was deductible when it was paid (and presumably taken as a deduction), and IS taxable when refunded. (You took a tax benefit when paying it, so you have to give back that same tax benefit when you get the tax (or some portion of it) refunded). I can see no reason that the interest wouldn't be taxable. Only certain interest, (from specifically declared but not all Municipal and some other bonds), is not taxable. Otherwise, the source of the interest does not effect it's character as interest, which is taxable. The fact it may be from a government doesn't mean much. Certainly lots of people get paid lots of things from the government that are taxable.