Midfielder: I'll try to be as unbiased as I can and just refer you to past history of the game in Australia.
WARNING
ONE OF MY LONG RANTS FOLLOWS...
You are suggesting State League teams made up by region, presumably selections made by the various Associations in those districts. To the exclusion of the ethnic based community clubs.
This very scenario arose in the late 50s early 60s, where the Associations, led by mostly Anglo-Saxon ethnic based District Associations, tried to exclude the 'ethnic' clubs, like Hakoah, Prague, APIA and Sydney Austral from the competition in NSW. It led to a breakaway comp, I think.
And the English, Scots and the Welsh (and Aussies) never got on with the other footballing immigrants from that time on. That split ultimately led to the NSW-RL taking a greater stronghold over the districts they functioned in. The Football in those areas was divided and weaker as a result.
One ponders that if the collective might of all the post World War 2 immigrants have banded together and put up a good solid NSW comp with the District Associations, not divided and wary of each other, then things might have been different with the attitude that the folks at the now-NRL have towards Football.
Sure clubs like South Melbourne STILL have issues to address, and it must be understood that the insular nature of the ethnic based fan base is not the best way to promote a sport (Tennis and Cricket is slowly learning that too, eh?).
But the passionate way these sort of clubs came about, was because they had been excluded and forced to defend the way they had structured their clubs (which mostly were community clubs for the ethnic communities they supported, and provided much needed social focus points for the various ex pats who found themselves in Australia) against a bureaucracy they saw as 20 years behind the times. Their views on Football was not being respected, and the players and administrators did feel that they were being dismissed purely because of their ethnicity.
A lot of the extremities we hear about 'ethnic' clubs would have been rendered ineffectual prior to it getting to that, if the clubs had been accepted by the general football community and the clubs asked to widen it's member base.
Having had to deal with a very old fashioned Auburn District Football Association in the late 60s and early 70s, as a kid, there was no glamour to representing your District at all. In fact, they made you pay for everything, even if you ended up being a Socceroo (and I do have my first hand source on that but won't name names). By then though, an Aussie kid like me, had little chance of trying out for Marconi, or Yugal Prague, as it was believed that they looked after 'their own'.
On the other hand, kids playing RL, if they found themselves selected for a District team, would end up not having to pay for registration fees, and would get their District Rep kit for free. It's no wonder the likes of Terry Lamb ended up playing RL - and he had his choices. Same for a lot of others who ended up playing rep RL for either Western Suburbs or Canterbury-Bankstown, but who may have started out playing 'sokkah'.
In summary, the change from an ethnic based membership for any such club, must come from within and with an assurance of acceptance of their views and a greater understanding of their positions. If you exclude them and cut them from any further participation, they will either wither on the vine, or become more insular and protective of what they have.
Above all, though, it must be put to everyone that the sport of Football is for everyone. Extremism, of any sort, can't be tolerated.
Oh, and Forza, I will still love you in the morning :-*
. Great way to spend rec. leave for the past week or so, eh? 
