I think it depends on the goals of the state. Are they trying to up the flagship’s ranking by attracting high stats students? Do they think that once the rankings improve they’ll be able to attract more full pay students who would otherwise have gone elsewhere? Are they trying to retain talented in-state students and attract OOS students in the hopes that they’ll remain and start their careers in the state? There can be a lot of reasons to offer merit aid, and they can be very good reasons. Or do they consider educating all state students to be their primary goal? And how much money is the state actually providing to the school? These days a lot of state schools aren’t getting all that much from their states, and that might impact whether the school feels the need to provide financial aid to lower income state students.
I don’t think either is the right answer for every state.