For federal income taxes in the US they are reported on line 8b of Form 1040, instead of line 8a like the rest of your interest income. This value is not included in the calculation for total income (line 22), and so you don't end up paying any tax on it.
As far as state income taxes, that will depend on your state. Generally municipal bond interest is only exempt from state income taxes if the bond was issued by an entity in your state.