Just my 2 cents and my apologies to all residents of Iowa, but that state is not a good representative of the country or Democratic voters. The state's not diverse and not metropolitan. Also, it's a low growth state and not the future. My pick would be Arizona.
I know some will argue that it's too expensive, as it's nearly twice the size of Iowa and advertising in Phoenix will be expensive. However, Dems raised quite a bit of money in 2004 and raising money will be key in 2008, so might as well find someone who can raise vast amounts and energize certain factions in the party. Further the southwest will be key in 2008, and in the future due to it's growth.
The brief case for AZ - It's a diverse swing state, w/ a large hispanic population, it has a large metropolitan area, and the state's growing vastly and is the future of the U.S. (Sorry Great Lake & Mississippi River states & Deep South). Have a candidate AZ selects and cons are in trouble in not only AZ, but probably in CO, NM and NV too. Also, the rural and exurbian voters of AZ, as well as the hispanic voters of AZ, are good representatives of the type of voters Dems need to court in order to become a future majority. As for the metropolitan areas of Phoenix and Tucson, the metro areas are becoming the base of the party, as seen by the dominance on the east coast, Chicago & Detroit and in CA. The Dems need to extend this vast base into places like Phoenix, Las Vegas and Denver. Altogether, the Dems are in trouble if they let Iowa and NH pick their candidate again. Discontinue the status quo. Cons are the anti-metro party.