One way to do this is to embed the state data into the stylesheet itself, and access the stylesheet document using document(''), as follows:
<xsl:stylesheet version="1.0"
  xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
  xmlns:my="whatever"
  exclude-result-prefixes="my">
  <xsl:output indent="yes"/>
  <!-- The value of the state you want to select, supplied in the input XML -->
  <xsl:variable name="selected-state" select="/xpath/to/state/value"/>
  <!-- You have to use a namespace, or the XSLT processor will complain -->
  <my:states>
    <option>Alabama</option>
    <option>Alaska</option>
    <!-- ... -->
    <option>Wisconsin</option>
    <option>Wyoming</option>
  </my:states>
  <xsl:template match="/">
    <!-- rest of HTML -->
    <select name="state">
      <!-- Access the embedded document as an internal "config" file -->
      <xsl:apply-templates select="document('')/*/my:states/option"/>
    </select>
    <!-- rest of HTML -->
  </xsl:template>
          <!-- Copy each option -->
          <xsl:template match="option">
            <xsl:copy>
              <!-- Add selected="selected" if this is the one -->
              <xsl:if test=". = $selected-state">
                <xsl:attribute name="selected">selected</xsl:attribute>
              </xsl:if>
              <xsl:value-of select="."/>
            </xsl:copy>
          </xsl:template>
</xsl:stylesheet>
Let me know if you have any questions.