But this seems to indicate that state tax credit reduces your state tax expense deduction for the year, but is not considered taxable income for federal purposes.
http://www.irs.gov/pub/irs-wd/13-0009.pdf
"Generally, a state income tax credit is treated for federal income tax purposes as a reduction or potential reduction in the original recipient’s state tax liability to the extent that the taxpayer can only apply the credit against a current or future tax liability. Consequently, an original recipient of a state income tax credit is not generally treated as having an accession to wealth that results in gross income under section 61. Additionally, when an original recipient of a state income tax credit applies the credit to reduce a state tax liability, the taxpayer has a lower deduction for state tax under section 164 of the Code."