The purpose of the SUBJECT= option in the REPEATED statement of PROC GENMOD is simply to distinguish those observations that are correlated from those that aren't. That is, it defines the clusters of correlated observations. Observations with the same value of the SUBJECT= effect belong to the same cluster and are assumed to be correlated. So, if you feel that there is correlation among all of the observations in the same state, then you should specify SUBJECT=STATE.
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