I had the original iphone 8GB
Then got the 16GB 3G.
Since 16GB is not enough to hold even a quarter of my music library, i put a couple of albums on there and maybe rotate them although I stopped even doing that. If I buy a new album I might stick it on there to listen to it straight away.
I listen to music on my commute to work. I use Pandora and last.fm, so don't need any space at all for those.
Even with a HUGE photo collection, lots of apps etc, I still only use about 1 GB of memory, so really I only needed the 8GB.
Now with recording video on the new 3GS, which takes up about 25mb per minute, you might use up some space.
I opted for the 16GB this time (mainly cos I had to fork out $399 not $199, and I am pretty broke at the moment, so I sold my 3G for $400 to cover the upgrade)
But it really does depend on your needs. If you plan on using apps like streaming music rather than your music library then I would sugggest what you can really afford. If money isn't that tight, and you want to hold lots of music on there, plan on recording video alot etc then for an extra $100 the 32GB is probably your best bet, since the resale value is probably going to be at least $100 more than the 16GB.