It's not all tax free for officers.
Here is the link to the 2007 military pay chart.
http://www.dod.mil/dfas/militarypay/2006militarypaytables/2007_Web_Pay_Table.pdf
See note 4.
Officer pay is tax free up to 6642.6 which is the pay of the SGM of the army. So an LTC at max pay would pay tax on $700.00.
Thanks for the clarification.