T. Rowe Price - Georgia Tax Free Bond Fund NCSRS Certified semi-annual shareholder report (management investment company)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act File Number: 811-4521

T. Rowe Price State Tax-Free Income Trust

(Exact name of registrant as specified in charter)

100 East Pratt Street, Baltimore, MD 21202

(Address of principal executive offices)

David Oestreicher

100 East Pratt Street, Baltimore, MD 21202

(Name and address of agent for service)

Registrant’s telephone number, including area code: (410) 345-2000

Date of fiscal year end: February 28

Date of reporting period: August 31, 2011

Item 1: Report to Shareholders

New York Tax-Free Money Fund

August 31, 2011

The views and opinions in this report were current as of August 31, 2011. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.

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Manager’s Letter

Fellow Shareholders

Led by long-term and lower-quality issues, New York tax-free municipal bonds produced strong returns and generally outperformed taxable bonds in the six-month period ended August 31, 2011. Performance was driven by several factors, including a significant year-over-year decline in municipal issuance, tumbling Treasury yields tied to sluggish economic growth, and the Federal Reserve’s intention to keep short-term interest rates very low for an additional two years. Investor confidence in municipal securities increased as dire predictions about massive municipal defaults in 2011 proved to be alarmist. New York’s economic picture continued to improve during the period, and the New York Tax-Free Bond Fund posted strong returns. The New York Tax-Free Money Fund return was roughly flat due to the Fed’s accommodative monetary policy, which kept rates near 0%.

MARKET ENVIRONMENT

Economic growth thus far in 2011 has been disappointing. After a strong start to the year, job growth faltered in the spring, and the national unemployment rate remains stuck at around 9%. The housing market also continues to languish at depressed levels. With commodity prices somewhat elevated—though generally lower than they were in the spring—and economic prospects in the U.S. and Europe very uncertain, consumers have been somewhat reluctant to increase their spending, and many businesses have restrained their expansion plans.

Despite the end of the Federal Reserve’s second round of quantitative easing in June 2011 and S&P’s recent downgrade of the U.S. government’s long-term sovereign credit rating, intermediate- and long-term Treasury interest rates fell sharply over the last six months, approaching historic lows amid renewed fears of a double-dip recession. Municipal yields also declined but to a lesser extent. The Fed acknowledged the fragility of the economy and indicated that it would likely keep the fed funds target rate in the 0.00% to 0.25% range—which has been in place since December 2008—until at least mid-2013. As our reporting period ended, Fed Chairman Ben Bernanke indicated that the central bank would contemplate the possible deployment of additional tools to stimulate the economy.

With 30-year municipal yields higher than 30-year Treasury yields, long-term tax-free securities are an attractive alternative, particularly for investors in the highest tax brackets. As of August 31, 2011, the 3.89% yield offered by a 30-year tax-free municipal bond rated AAA was about 108% of the 3.60% pretax yield offered by a 30-year Treasury. An investor in the 28% federal tax bracket would need to invest in a taxable bond yielding about 5.40% in order to receive the same after-tax income. (To calculate a municipal bond’s taxable-equivalent yield, divide the municipal bond’s yield by the quantity of 1.00 minus your federal tax bracket expressed as a decimal—in this case, 1.00 – 0.28, or 0.72.)

MUNICIPAL MARKET NEWS

Nationally, new municipal issuance through August 2011 totaled only about $163 billion, according to The Bond Buyer. This is well below the brisk pace of the last few years. Contributing factors include the expiration last December of the Build America Bond program, which led to increased issuance in 2009–2010, and a pervasive sentiment toward fiscal austerity. While demand for munis has been weak for much of the last six months, it has been improving due to increased interest from individual investors and some nontraditional investors purchasing munis directly. Cash flows into municipal bond funds have been mostly negative throughout our reporting period, reflecting the weakening economic outlook and some concerns about prevailing low yields.

Many states continue to face fiscal difficulties and have been forced to raise taxes and fees and cut spending to close budget deficits. We believe many states deserve the high ratings that they have been given by the major credit rating agencies, and we do not see a near-term threat to their ability to continue servicing their outstanding debts. However, we continue to have longer-term concerns about potentially onerous future pension obligations and other retirement benefits. In any event, the fiscal woes of state governments do not necessarily limit our tax-free investment opportunities. Many municipal market issuers continue to have good credit profiles.

Finally, the municipal market continues to show remarkable resilience in the face of a steady drumbeat of negative publicity, negative cash flow, and political challenges to tax exemption. In the last six months, every major municipal bond sector produced strong gains, led by long-term and lower-quality issues—a remarkable recovery from their poor performance at the end of 2010. Revenue bonds narrowly outperformed both local and state general obligations (GOs). Among revenue bonds, health care was one of the top-performing segments, as hospitals are adjusting to new fiscal realities and last year’s health care reform legislation. We remain cautious and selective on health care due to the likelihood of tighter reimbursement policies and state budget cuts that could affect Medicaid payments to providers. Medicaid and Medicare could also be targets for federal spending cuts. Tobacco bonds performed well due to rumors of a possible legal settlement of a dispute that may result in a significant lump-sum payment from tobacco companies to the states. We continue to underweight this sector due to declining long-term tobacco consumption trends. Solid waste bonds lagged modestly but produced good returns in absolute terms.

NEW YORK MARKET NEWS

The New York state employment picture brightened during the past six months. While the state’s unemployment rate remained elevated, at 8.0% in July 2011, it was below the national average of 9.1%. The state’s nonfarm employment level, which includes private sector and government jobs, increased by 114,200 in the 12 months through July, a net gain of 1.3% compared with 1.0% for the nation. In New York City, the unemployment rate in July was 8.7%. New York maintains above-average wealth levels with 2010 per capita personal income at 120% of the nation, ranking fifth highest among the states.

Moody’s Investors Service rates New York’s GO bonds Aa2, while S&P and Fitch Ratings both rate the bonds AA. All three agencies maintain “stable” outlooks, indicating that a near-term change in the rating is not expected.

The state’s fiscal condition has stabilized due to the slowly recovering private sector, which has boosted tax revenues. The state legislature approved a $132 billion budget for fiscal 2012, which contains about $5.4 billion in spending cuts from the state’s Medicaid program and school aid. Additional savings, including cuts to state agencies and non-school aid to localities helped close an estimated $10 billion budget gap. Audited results for fiscal 2011 were not available by the end of our reporting period, but on a budgetary basis the state ended the year with $1.38 billion in general fund reserves (2.5% of revenues), including $1.2 billion in rainy day reserves.

New York’s debt burden is among the highest in the nation, according to Moody’s. Unlike many other states, however, New York’s pension funds are well funded. The majority of New York’s debt is appropriation-backed, which means that the legislature must approve debt service payments on these obligations annually, but it has no legal obligation to continue to consent to these expenses.

New York City continues to exhibit signs of economic and fiscal improvement and has demonstrated strong fiscal management, including multiyear financial planning and rolling forward its budget surplus from stronger years. Although audited results for fiscal 2011 were not available by the end of our reporting period, the city estimates that it ended the year with a $3.7 billion surplus (5.6% of revenues), which will be rolled forward to help balance fiscal 2012. Property taxes remain the city’s largest revenue source and act as a stabilizing factor given the city’s practice of phasing in tax assessments over five years. Still, the city faces budget gaps of $4.6 billion in fiscal 2013, $4.8 billion in fiscal 2014, and $4.9 billion in fiscal 2015. Agency ratings for New York City are Aa2 from Moody’s, AA from S&P, and AA from Fitch, all with stable outlooks.

PORTFOLIO STRATEGIES

New York Tax-Free Money Fund
The New York Tax-Free Money Fund returned 0.01% for the six-month period ended August 31, 2011. As the Fed kept official shortterm interest rates in the historically low range of 0.00% to 0.25%, the seven-day simple yield remained very low and ended August at 0.01%.

All money market instruments—including Treasuries, agencies, corporates, and municipals—continue to trade in a very narrow range around the fed funds target rate range of 0.00% to 0.25%. With volatile financial markets, the European debt crisis, uncertainty over U.S. debt obligations, and a sputtering economy all serving as a backdrop, investors continue to prefer the safety and quality of money funds despite their meager yields.

A survey of the broader money market shows that, despite concerns over the debt ceiling extension in August, Treasury bill investors continue to demand quality and liquidity. Six-month bills now yield 0.03%, while one-year bills yield 0.09%. In other markets, the benchmark 90-day LIBOR rate moved as low as 0.25% before recovering somewhat to 0.33% as the six-month period ended.

New York municipal money market rates continue to follow the pattern of the broader money markets. Rates across the municipal curve are lower by about 10 basis points compared with six months ago. Overnight rates averaged 0.12% in the most recent six-month period, while seven-day rates averaged 0.17%. Ninety-day commercial paper rates averaged 0.22%, while one-year note yields averaged 0.29%.

Credit quality remains a primary focus in the portfolio, in terms of the municipal issuers as well as the various bank guarantors that provide liquidity support to municipal debt. While better off than many other states, the fiscal issues New York faces have created a challenging investment landscape. Our portfolio continues to focus on higher-quality issuers in the education, transportation, and health care sectors. As much of the short-term municipal market requires some form of bank support, we are looking to only the highest-quality banks for such backing. The ongoing problems facing some bank guarantors, such as the Belgian bank Dexia, have prompted us to eliminate positions in banks that serve as liquidity providers.

As the Fed has indicated its intent to maintain the current low fed funds target rate until well into 2013, the prospect of higher income for money fund investors continues to be deferred. Nonetheless, investors clearly rely on their fund investments as a source of stability in uncertain markets and as a ready source of liquidity. Our focus on meeting these needs remains unchanged throughout this challenging period.

New York Tax-Free Bond Fund
The New York Tax-Free Bond Fund returned 6.23% for the six-month period ended August 31, 2011. The gain modestly exceeded that of our Lipper peer group average. The fund’s long-term record relative to its competitors also remains favorable. (Based on cumulative total return, Lipper ranked the New York Tax-Free Bond Fund 13 of 92, 30 of 84, 20 of 76, and 16 of 68 New York state municipal debt funds for the 1-, 3-, 5-, and 10-year periods ended August 31, 2011, respectively. Returns will vary for other periods. Past performance cannot guarantee future results.)

The municipal bond market has rebounded following fairly lackluster performance early in the year. Two main factors have driven the municipal market’s strong performance in recent months. A limited supply of new municipal bond issues—combined with steady demand from investors reinvesting proceeds from maturing issues and seeking a higher-yielding alternative for cash—pushed yields down and lifted municipal bond prices by the end of the reporting period. Furthermore, a rally in U.S. Treasuries spurred by renewed recession fears and a global flight to quality amid the spreading European debt crisis also benefited municipal bond prices.

Over the past six months, we positioned the fund to benefit from an overweight to long- and short-term securities. This posture of underweighting intermediate-term bonds relative to the Barclays Capital Municipal Bond Index was based on our concern that securities in the 3- to 10-year range were susceptible to higher rates, which did not come to fruition. While this defensive positioning weighed on performance, the fund outperformed its benchmark due to its allocation of securities with longer maturities that offered higher yields.

The fund’s duration—a measure of its sensitivity to changes in interest rates—was slightly shorter than that of its peers for most of the period and declined from 7.1 years to 5.1 years as rates moved lower late in the period. The fund’s 30-day SEC yield also declined from 3.92% to 3.18% due to falling market rates. However, the fund’s weighted average maturity increased from 16.3 years to 16.6 years over the past six months. Overall quality diversification was relatively unchanged, although we increased the fund’s exposure to AAA rated bonds by five percentage points to 7% of the portfolio and increased AA rated bonds by five percentage points to 49%. The fund remains a high-quality portfolio with 83% of securities rated A and higher. We will continue to ensure that all securities in our portfolio meet the rigorous demands of our in-house research.

Overall trading activity was modest and a reflection of light new issuance. Nevertheless, we were net buyers of bonds, reinvesting cash from coupon income and bond maturities. Additions to the fund were mostly in the 15- to 30-year range as the steep yield curve kept rates in the long end compelling. We slightly decreased exposure to U.S. territory bonds from Puerto Rico and the Virgin Islands near the end of the reporting period due to strong performance. The issuance calendar is expected to pick up throughout the remainder of 2011 and will offer an opportunity for reinvestment as well as to test the market’s appetite for historically low yields.

We increased our allocation to the education sector, which is now the fund’s largest, at 15.5%. The move reflects the state’s abundance of well-regarded higher education institutions—both state and private—that issue tax-exempt debt. Transportation is our second-largest allocation. The fund is overweight versus the benchmark in health care, which offers significantly higher yields relative to other sectors with comparable ratings. However, we remain concerned that curbs on reimbursement costs in Medicaid and potential federal cuts in Medicare could have an adverse effect on health care. Within the sector, we have selectively invested in individual issues that we have deemed appropriate through our in-house analysts’ fundamental credit research. We favor revenue bonds and remain underweight relative to the benchmark in GO debt as both the state and a number of localities may continue to face challenging budget environments.

A rated and BBB rated securities, including the health care and higher education sectors, produced strong results as they bounced back from weak demand and valuations earlier in the year. The fund’s biggest underperformers consisted mostly of short-duration maturities of less than three years.

OUTLOOK

While we are pleased with the improved performance of and sentiment toward municipal bonds, we acknowledge that the credit and economic environment for municipalities is likely to remain challenging. The slow economic recovery, the housing market downturn, and high unemployment have reduced the tax revenues collected by state and local governments, and municipal bond defaults, which historically have been rare, could increase moderately. Defaults have been mostly limited to the smallest issuers in the riskiest of sectors, such as land-backed, multifamily housing, or hospitals. Income and sales tax revenues have begun to increase, providing some support for state governments. On the other hand, cutbacks in state support and persistent declines in property tax revenues will keep local municipal issuers vulnerable. If the economy slides back into a recession—which we are not predicting—municipalities will face even tougher challenges.

State and local government liabilities such as pension benefits and health care costs are a growing long-term concern. Maintaining balanced budgets and addressing these long-term pressures require careful and dedicated work by state and local officials. Many issuers are trying to make the difficult but necessary fiscal decisions as they adjust to high unemployment, slow economic growth, lower tax revenues, and other tough conditions. These efforts will need to continue—with or without additional federal government assistance.

While it is true that S&P downgraded several thousand municipal issues directly linked to U.S. Treasuries (such as prerefunded bonds) shortly after downgrading the U.S. government’s long-term credit rating, we continue to believe that the municipal bond market is a high-quality market, with good opportunities for long-term investors. While shorter-term securities have unattractive absolute yields and could be vulnerable if the economy picks up unexpectedly, longer-term and lower-rated investment-grade bonds continue to offer a reasonable yield advantage. We expect demand for munis to continue increasing as fears of major municipal defaults wane and investors seek attractive tax-free income in an environment of low interest rates.

We believe T. Rowe Price’s strong credit research capabilities have been and will remain an asset for our investors. We conduct our own thorough research and assign independent credit ratings before making investment decisions. As always, we are on the lookout for attractively valued bonds issued by municipalities with good fundamentals—an investment strategy that has served our investors well in the past.

Respectfully submitted,

Joseph K. Lynagh
Chairman of the Investment Advisory Committee
New York Tax-Free Money Fund

Konstantine B. Mallas
Chairman of the Investment Advisory Committee
New York Tax-Free Bond Fund

September 15, 2011

The committee chairmen have day-to-day responsibility for managing the portfolios and work with committee members in developing and executing the funds’ investment programs.

RISKS OF FIXED INCOME INVESTING

Since money market funds are managed to maintain a constant $1.00 share price, there should be little risk of principal loss. However, there is no assurance the fund will avoid principal losses if fund holdings default or are downgraded or if interest rates rise sharply in an unusually short period. In addition, the fund’s yield will vary; it is not fixed for a specific period like the yield on a bank certificate of deposit. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in it. Bonds are subject to interest rate risk (the decline in bond prices that usually accompanies a rise in interest rates) and credit risk (the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default by failing to make timely payments of interest or principal), potentially reducing the fund’s income level and share price.

GLOSSARY

Barclays Capital Municipal Bond Index: A broadly diversified index of tax-exempt bonds.

Barclays Capital U.S. Aggregate Index: An unmanaged index that tracks domestic investment-grade bonds, including corporate, government, and mortgage-backed securities.

Basis point: One one-hundredth of one percentage point, or 0.01%.

Duration: A measure of a bond fund’s sensitivity to changes in interest rates. For example, a fund with a duration of five years would fall about 5% in price in response to a one-percentage-point rise in interest rates, and vice versa.

Federal funds rate: The interest rate charged on overnight loans of reserves by one financial institution to another in the United States. The Federal Reserve sets a target federal funds rate to affect the direction of interest rates.

General obligation debt: A government’s strongest pledge that obligates its full faith and credit, including, if necessary, its ability to raise taxes.

Gross domestic product (GDP): The total market value of all goods and services produced in a country in a given year.

Investment grade: High-quality bonds as measured by one of the major credit rating agencies. For example, Standard & Poor’s designates the bonds in its top four categories (AAA to BBB) as investment grade.

LIBOR: The London Interbank Offered Rate is a benchmark for short-term taxable rates.

Lipper averages: The averages of available mutual fund performance returns for specified time periods in defined categories as tracked by Lipper Inc.

Prerefunded bond: A bond that originally may have been issued as a general obligation or revenue bond but that is now secured by an escrow fund consisting entirely of direct U.S. government obligations that are sufficient for paying the bondholders.

Revenue (or revenue-backed) bond: A bond issued to fund specific projects, such as airports, bridges, hospitals, and toll roads, where a portion of the revenue generated is used to service the interest payments on the bond.

SEC yield (7-day simple): A method of calculating a money fund’s yield by annualizing the fund’s net investment income for the last seven days of each period divided by the fund’s net asset value at the end of the period. Yield will vary and is not guaranteed.

SEC yield (30-day): A method of calculating a fund’s yield that assumes all securities are held until maturity. Yield will vary and is not guaranteed.

Weighted average life: A measure of a fund’s credit quality risk. In general, the longer the average life, the greater the fund’s credit quality risk. The average life is the dollar-weighted average maturity of a portfolio’s individual securities without taking into account interest rate readjustment dates. Money funds must maintain a weighted average life of less than 120 days.

Weighted average maturity: A measure of a fund’s interest rate sensitivity. In general, the longer the average maturity, the greater the fund’s sensitivity to interest rate changes. The weighted average maturity may take into account the interest rate readjustment dates for certain securities. Money funds must maintain a weighted average maturity of less than 60 days.

Yield curve: A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux. One of the key activities in managing any fixed income portfolio is to study the trends reflected by yield curves.

Performance and Expenses

GROWTH OF $10,000

This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.

GROWTH OF $10,000

FUND EXPENSE EXAMPLE

As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.

Actual Expenses
The first line of the following table (“Actual”) provides information about actual account values and expenses based on the fund’s actual returns. You may use the information on this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number on the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes
The information on the second line of the table (“Hypothetical”) is based on hypothetical account values and expenses derived from the fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund’s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000 ($1,000 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts employing automatic investing; accounts electing to receive electronic delivery of account statements, transaction confirmations, and prospectuses and shareholder reports; accounts of an investor who is a T. Rowe Price Preferred Services, Personal Services, or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $100,000); and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.

You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.