Let me start with my premise: Federal grants to states are unconstitutional. They involve Congress in policies beyond its enumerated powers, and they are inherently coercive -- the whole point is to bribe states to do things they wouldn't otherwise do.
Unfortunately, the Supreme Court has never struck down a federal grant program as being unduly "coercive." The issue came up again in the ObamaCare litigation, where it was argued that the expansion of Medicaid is coercive. I predict that the court will say that the Medicaid expansion isn't coercive on the grounds that states have a "choice" - they can choose not to participate in Medicaid.
The oft-repeated assertion that States have a "choice" is a fallacy. Governors face a situation in which their citizens have already been taxed to support Medicaid, highways, mass transportation, etc. If the Governor turns down the "free money" from Washington, the taxpayers will end up subsidizing the other 49 states. It's political suicide.
The best solution is to end all federal grant programs. But, short of that, is there a way to give States a real choice? That is: is there a way to allow States to opt out of federal programs and not have to subsidize the other states?
One way, I suppose, is the block grant approach. States that opt out of certain federal programs get a lump sum from Uncle Sam with no-strings attached. The States can then use the money to reduce their own tax rates, or pay bills, or whatever.
Or perhaps citizens of states that opt out of certain programs could get a tax rebate on their federal income tax. Now, I know that federal taxes are subject to the constitutional requirement of "uniformity." But the Supreme Court has allowed at least some geographic variations in taxation in Ptasynksi v. US (which upheld special tax provisions for Alaskan oil which did not apply to oil produced in the lower 48). Perhaps that precedent could be used to support different tax treatment for taxpayers in states that just say no to federal programs.
Any other ideas? Notwithstanding all the Tenth Amendment fervor out there, I'm having a hard time finding specific proposals to promote state autonomy.