The nation is an imagined community; the state is not illusory at all.
I agree that both Stalinism and social-democracy seek to enhance the role of the state: the former wishes to replace the market and build up state repression; the latter wishes to substitute the market to some degree and expand social welfare. In both cases the instrument is the state.
Marx’s notion of the “withering away of the state” is largely nonsensical. The state, an entity confined by history and geography, is an amalgam of law, administration and coercive violence in which each element is dependent on the other two. To imagine society in the absence of these institutions is fanciful.
The question is not whether the state, but what kind of state.