I like your 50 state plan.
All Federal expenses are apportioned by population, and the States are responsible for collecting them. 50 little laboratories. Some will opt for a flat tax, some a sales tax, some an oppressively progressive tax.
As you say, the states that do a bad job here will either improve or lose their productive population and businesses.
One of the problems with the Fair Tax is that there is still a federal administration needed to collect the tax although far smaller and less intrusive that what we have now.
Also...As regards to rebates to citizens, that absolutely would become a political juicy plum for politicians to gnaw at.
However....The Fair Tax would be MUCH MUCH MUCH better than the income tax. ( Yeah! I am shouting.) I would definitely support it even if it is less than perfect.