It should be added as income unless you said you did not itemize in 2016 or that you took the sales tax deduction. The reason you enter it in as tax paid in 2017 is because it is then used as an itemized deduction on your 2017 schedule A. That's how it is balanced out. It is income to you but your itemized deduction for state tax paid in 2017 increases and, being part of your itemized deductions, it lowers your adjusted gross Income before taxes are calculated.
