1) Double the cost of settlers. Add +1 hammer per citizen when training settlers.
2) Subtract 1 gold from the trade income of cities (to pay for the road underneath the city). Add 1 gold to the palace.
3) Subtract 1 hammer from the base city tile (two free hammers is very strong). Add 1 hammer to the palace.
4) Add 0.25 Happy per pop to Theaters.
5) Add 0.25 Happy per pop to Stadiums.
Optimal ICS response: grow to size 4 or so, take Liberty, use the capital and a food-rich city (so it grows rapidly) as Settler pumps. Satellite states play as they do now. The machine takes a little longer to get started, but after that it runs fine. If anything, you've encouraged early warmongering on Immortal/Deity. (The AI's production advantages work on Settlers, so why make them yourself at full price? Puppeting is a small price to pay if a city costs more than a Colosseum to build.)
The basic problem is that the systems intended to force vertical growth do not. Golden Ages and most SPs pay larger dividends as empire size increases, so you'd rather have fewer of them leveraged by larger populations. You need to rework the two systems so that they meaningfully constrain if you want to solve the problem.
Suppose an absurd balance situation: we change the rules so that Happiness Golden Ages provide an exponentially scaling amount of Gold, Science and Hammers per pop per turn, and the first Tradition policy meaningfully boosts growth in the capital. Then it would make sense to hook up luxuries, run a +16H surplus or so if you could get three within range (trading a duplicate if necessary) and pop the first GA around turn 50. Then you would pump out half a dozen Settlers, the early buildings you want and another Worker or two while pounding out most early techs.
That's obviously an extreme remedy, and it alone won't work forever (you'd just want to ICS after tripping the early GA). Long story short, though, if you want to encourage players to grow vertically then you need to change the rules that preclude vertical growth: punitive, exponential food boxes, the way that many SPs scale with empire size and the fact that Golden Ages scale linearly with population rather than hugely rewarding small numbers of large cities.
