I actually think this would cement the idea of repressive governments and a decaying Sector.
Tying it to Rep would create more meaningful choices, especially in that "neutral-to-inhospitable" range where they're not going to shoot on sight but they will make life difficult for you because you're not one of them. I don't have a problem being hostile with a faction (and I'll shoot my way out if I know the rep hit doesn't matter) but if I'm on the cusp, I have to choose between losing inventory items, ships, commodities, etc. vs. engaging them directly. Even if I think I can take the fleet in question, I have to weigh the overall pros and cons.
I also like the idea of repo'd ships being targets of opportunity, whether its your own ships or other ships that have been taken by that faction. As long as the system can't be gamed too hard, it could be fun getting your old ships back or having a guaranteed chance to recover a ship you want (all via procedural missions). Of course, you'd have to fight your way in/out but maybe there's little/no rep hit if you're recovering what's yours?
Also, I like the added benefit of having high rep with certain factions making you virtually immune to the confiscation. In fact, at very high rep you might get a perk mission that says "Hey, buddy old pal, we just 'acquired' this Eagle in the Corvus system. Head over to Jangala and so-and-so will give you a great deal on it." So, you may lose a ship or two over the course of the game by virtue of not playing nice with some factions but other factions may throw you a bone or two if you schmooze them enough.