Is there any difference between them, or are they actually synonyms? If we merge them, which one should we keep?
I can't think of any important distinction between the two. municipal is a more general term for city, when city is taken to connote a certain scale.
I'd vote for city as more familiar, with an explanation on the tag wiki that says it stands for all local-government level questions.
That said, I'm skeptical of the value of either tag. How does it help anyone use this site more effectively? I guess I'll try to put my opinions in that regard in the What is this site's tagging philosophy? question.