(The following comments only apply to the state of our state here in the United States.)
As with religion, so with art: taking the state's money means you're on the state's payroll, and like any boss, the state will act the way a boss acts towards an underling.
For the artist, then, as for the religionist, taking the money means making a choice about the cost of compromise to principle and to practice. And that choice always means a sacrifice: nothing is ever achieved, good or bad, without blood being shed.
A shining example of this is the obit of PBS in the October 2014 issue of Harper's. Being on the government's dole has only gutted the idealistic aims of PBS' founders until we are left with doo-wop pledge drives and obedient news media.
The state has no obligation to support "the arts" -- it is not a core function of the state, in part because it is not in the state's interest to have a restive critical-minded citizenry. However, if a state decides to support art, then it will most likely support art that calms and delights, not pokes and prods, a logical policy, given its interests.
Where does this leave "art" (if I can use this single word as a stand-in for a complex social reality)? Again, a comparison with religion is apt. At one historical point, religious belief and political belief overlapped enough to be considered a consolidated belief-system.
But once these systems got separated by war and economics, a personal, private relationship with God rather than a collaborative but corrosive relationship with Caesar became the only way to preserve the purity of the beliefs. This doesn't mean that religionists won't try to dance with the secular political devil, but inevitably, the political state will never become the theocracy they want, and the political religionists end up being co-opted and then discarded, their beliefs sullied and weakened.
The lessons here for artists are these. The best art is created in private, and the artist should not ask the state for assistance to do this. If the artist, however, wants to do something more open and collaborative, on the public's dime, then the art produced should calm and delight, not poke and prod. Give money to the Roundabout Theatre in New York so that it can do revivals of old plays and musicals. Give money to the Metropolitan Museum of Art so that it can bring in an exhibit of Impressionists. Give money to The National Endowment for Humanities to chart endangered languages. Give money to a local studio in Harlem so that it can present art created by people in the neighborhood. All of this is edifying, and no taxpayer or legislator should find this kind of support offensive or unmerited.
However, if the artist (person or organization) doesn't want to work under these constraints, then there is only one other process and metric for success (however that is defined): the marketplace -- art as a business and conducted as one.
True, even businesses get state largesse, so perhaps here is how the intersect of art and state can work, since the state does have an interest in having as many of its citizens gainfully employed as possible and not hanging out in coffee-shops with free Wi-Fi plotting revolutions.
A small theatre company gets a grant to incubate itself -- but it is only a starter grant, not renewable. (Or the grant could be for one year with an automatic renewal for a second year, but then nothing after that.) The same could be done for an individual artist wanting to start a career. Reports have to be sent in on how the money is used, but beyond that, the artists are free to build a base for themselves as best they can, and after a set time, they are on their own.
Larger organizations, as outlined above, can get continuing support, but it needs to be a minimal percentage of their budget, an amount that if it were withdrawn, the institution would still survive.
At all levels the expectation is that the person or the company or the institution will support itself, thereby gaining the self-respect that comes from self-reliance and minimizing the scrapes and scuffs that come from artists continually rubbing up against politics and forced to act like Oliver Twist asking for more. The state will avoid divisive arguments about "government funding of the arts" since the funding will be a miniscule part of the overall state budget (as it is now) and will only be disbursed, on a smaller scale, to jump-start enterprises and, on a larger scale, to support art that does not offend, intimidate, or confuse.
In other words, the less that the state and art have to do with each other, the better. Art is a legitimate economic and social activity (although a difficult one in our philistine society), and like any other legitimate activity, the state should encourage its development.
In fact, the best way the state could do this would be to fund art programs in schools to build a citizenry knowledgeable about art and its history and practice. This would do more than any system of grants to help artists find success because they would be able to preach to a choir primed to hear what they have to say.
The state in our United States is an inconstant patron of the arts, which only engenders fruitless debates about obligation and taste. Make state support of the arts more constant by making it minimal in amount, limited in duration, and aesthetically agreeable -- in other words, so that the art the state promotes furthers its own interests. This is both a sound policy and a stimulating caution to all artists interested in maintaining their independence and perfecting their practice.