I would stick with folders for two main reasons:
- First, yourdomain.com is part of your online brand. If every state's URL is statename.yourdomain.com, I think this takes away from your brand because the first thing people see when they look at the URL bar or in search results is a state name and not your URL
- Next, I second everyone else, subfolders are much more organized, subfolders look better, and subdomains are an old SEO strategy (a little spammy, especially for a new domain)