So after probably 20 hours of picking apart code - starting over - disabling and enabling modules and plugins - I finally found a simple cause to my "Virtuemart 2 (VM2) State Dropdown not working" problem. Maybe I can save you this trouble.
Be SURE you have a menu item pointing to the Virtuemart Cart module.
For whatever reason - when I disable this menu item - the state dropdown doesn't work any more. Turn it back on - it works.
I hope this helps a few people. Let me know if it works for you.