As soon as I read that Ansible was easier than Terraform, I knew you were probably doing something wrong.
Ansible is fine to be clear, for managing things like configuration within compute instances and databases (such as user accounts for example). It is good for this, but for building and maintaining the creation and lifecycle of the infrastructure itself, it is the wrong tool for the job.
First of all, you are using local state in Terraform which is a terrible, terrible idea. You are already seeing why based on your problems with it. I've never seen an organization that actually works on a team with local state backends. You need to use a remote state backend. The most popular is to just use a provider like S3 (or equivilant with other clouds). The state file is pulled from there at plan/apply-time and then pushed back up there when complete. Then everyone is always getting the latest statefile and it is shared automatically without needing to commit it.
This solves other problems too. Like what if two people try to apply at the same time? Well that is why state-locking exists. Before the remote state file is pulled down, it is "checked out" and locked. Now only that person can use the state file until it is checked back in and unlocked. THis happens seamlessly in Terraform once you set up a state lock backend. You still just run `terraform apply` and all this happens seamlessly. Now if someone else tries to do it while you're already updating things, then their cli will wait until you are complete. THen they will end up pulling down all of the changes you just made. If they were running the same code as you, then it would say there is nothing to update. Easy.
Encryption of your state file also happens this way, by encrypting the remote backend. It doesn't solve local encryption and this is admittedly a problem with Terraform which Hashicorp has refused to address, but is already being addressed with OpenTofu. But as a result, secrets should simply not be in your state file. You should use a provider like secrets manager to do this for you and then you only have references to your secrets in state, instead of the secrets itself. This is simply a known rule just like you don't commit anything secret to a git repo, you don't put anything secret in your terraform. It's the same way.
Lastly, state versioning. This is accomplished through your remote backend state provider too. We use S3 at work, so we get native versioning there and we can (and have) rolled back state in emergencies (although this itself is not a great practice, just like how you should never edit previous commits in git), but it can be done and preserved this way as a safety mechanism.
As for your auditing and key rotation of secrets, it once again sounds like you are doing this wrong. You shouldn't be updating the secret keys themselves in Terraform. You should only be creating the secrets and passing around references to them in Terraform. This requires a better understanding of how Secrets Manager works. Creating a secret in AWS for example only creates an empty "repo" for a secret. It has an id and metadata, but no inherit value. This is what you do in Terraform. Adding the value to the secret is a seperate (hopefully automated) process. The secret value itself should be hidden from honestly all of your users (even yourself). Rotation should happen automatically with Lambdas or automated jobs of some kind. You could even do something with ansible for this. You rotate the secret value, but the secret reference doesn't change and everything should continue to work with secret versioning and some proper architecture on your side. This should NOT be done in terraform. Auditing your secrets again, is not a job of Terraform. This is a seperate process from IaC. Terraform is IaC. Use the right tool for the job.
State merge conflicts should never happen as you fear because it is wholly managed by the terraform binary. Yes you might have to resolve state conflicts where someone added too much drift outside of Terraform and you need to fix it, but the cli provides tools for making these changes and you shouldn't edit them yourself. Using these tools (like `terraform state mv` or `terraform state rm` or `terraform import`) should resolve state conflict without causing any sort of merge conflict. The state file (with proper state locking) will only ever be edited by the tf binary and only by one person at a time.
So I wouldn't hate on Terraform just yet. It sounds like you and your whole team is using it wrong.