It's an admirable plan, but that's going to be a heck of a travel bill for some of those teams, and a lot of the local games, even if they get killed, are money makers for those programs.
I do think you're asking to try and make something that has so many variables a constant. A lot of it has to do with the community, what kind of kids are there, whether people move, etc. It would be near impossible to legislate, and if you put them in their own separate class, I bet they would want a state championship, or at least the schools and parents would. Otherwise you would get a lot of "Why are we even playing" talk.
I just don't see any physical way that this is possible, unfortunately. I think that the same teams would end up in that class year after year. Instead of competing against better talent, you're just in a pool of people that are as bad as you, and once you move up, you start losing again, then end up back down in the bottom.