One point of the debate is what "physical states" is supposed to mean? Either its some space of distinguishable states as per some observer or measurement device, if you take the instrumentalist perspective, or it is an equivalence class of spaces from all possble observers (or typically from a SUBSET of all possilbe observers). Which is the real thing and what is just "gauge"? You can make reasonable arguments for both views, and the differences also roots in differences between GR and QM. Its like a chicken and egg situation. What is the more fundamental starting point? the equivalence class with constraints or its members that negotiates?
Both ways has its own problems.
Just changing the frame of references, clearly can not exhaustively generate all possible observers because an observer is more than moving origos. In particular what is missing is complexity and different histories that distinguishes observers and constitutes part of the observer "background".
Renormalisation flow is not a general solution to this either. While it is true that decreasing observer complexity, necessarily is a lossy transformation, the situation is necessarily not just a simplistic block-renormalisation. Also the other way of the transformation - the invserse of the lossy transformation must be seen as an evoutionary learning making "theory space" inseparable from the tangent space of the differentially evolving state space.
For example, how are two observers, literally living at two different complexity levels supposed to be able to compare a truth statement? Here i argue that - after the natural UV and IR cuttof implied by the observers complexity, we might without contradiction arrive at a situation that these observers disagree about logical statements. If we defined this in termas of a truncated computation.
Just wanting to support the OT as a good question if meant in the most general sense, but i think without conceptually clear answer. I get the impression that this is a kind of beginners question but my own experiensce is that it happens that such questions are handled with a deceptively trivialising attitude by teachers. I rememer this myself, but after a while you figure out that the reason for this is that there IS no good answer, and then its better to acknowledge this instead of denying the question.
QM and QFT as they stand can not handle these questions properly though, but that makes the question no less important.
/Fredrik