Internal state is typically a small-ish bag of bits that mixes, and gets mixed deterministically, as the hash mechanism is used. See the internals of the Mersenne Twister[0] for an example/analogy.
It actually turns out there are performance benefit by having a larger seed, but not too large. (If you think about it this makes sense consider how many bits you can change with an average combining operation, and with a worse case combining operation.)
[0] https://en.wikipedia.org/wiki/Mersenne_Twister#Initializatio...