Western town is small beginning for this key US state (2,7)
I believe the answer is:
st austell
'western town' is the definition.
(town in Cornwall)
'is small beginning for this key us state' is the wordplay.
'is small' becomes 's' (abbreviation - e.g. clothes size).
'beginning for' suggests taking the first letters.
'key us' becomes 'aus' (I can't justify this - if you can you should give a lot more credence to this answer).
'state' becomes 'tell' (both can mean to say something).
The initial letter of 'this' is 't'.
's'+'t'+'aus'+'tell'='ST AUSTELL'
(Other definitions for st austell that I've seen before include "Cornish market town" , "China clay centre of Cornwall" .)