Taking 101 is lovely and certainly a lot more scenic than I-5. I personally think Newport is the ideal town to stay in on the coast if you have kids, because it has a lot of cool attractions (the aquarium, the haunted light house, the Ripley's Believe it or Not Museum) and it's big enough that you have a good selection of hotels/motels to choose from. When I was a kid, my parents took us there to stay in a rental house for a week overlooking the beach and it was one of the best vacations ever, maybe even better than the time we drove down to Disneyland. Seaside is a close second in terms of kid-friendly amenities. I'd stay on 101 until you get close to Portland, then head inland over the mountains. I know zippo about fireworks on the coast, though, so hopefully someone else will chime in. I'm sure Portland has an awesome display, though.
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