"The confusing part is the state is going to issue a 1099 regardless."

That's got nothing to do with if the money is applied to the next year or refunded. One is the banking. The other is the taxable status.

It's a refund of an amount overpaid; and if it was an itemized deduction for the year paid, it also was over-deducted. It's still taxable, but what you are describing is like the refund amount is offsetting another credit that is so large, the taxable amount is fully applied.

The money still is the taxpayer's to determine how to use it.