What absolutely makes me want to scream is that, if you pay too much and get some money refunded, they consider that refund income and they tax you on it the next year.

It's NOT INCOME. It was already my money. If anything, I should get it back with interest, since they had it for a while.

Federal tax refunds are not income. Does the IRS send you a W-2 or 1099 for them? Are you writing them in under "other income" or something? Unless you're doing something seriously weird, they aren't income, aren't reported anywhere as income, and aren't taxable.

For state/local taxes, as smoyer points out, if you erroneously deducted a larger amount of state taxes than you actually owe, then, when you get the difference back, you have to correct that on the next year's form, if you had claimed the larger amount as a deduction. If that weren't the case, you could game the system by purposely having your state taxes massively over-withheld, deducting the inflated amount from your federal taxes, then receiving a state tax refund.

This is not true for money refunded by the Feds ... But if you deducted the full amount of state or local taxes previously, then you didn't pay taxes on those and a refund is indeed income.

It's as easy easy as (not pie) flying with wax and feather wings.