I can give you advice as someone who has had both. I started out with a 16GB Touch and an LG EnV (Verizon). I originally didn't go with the iPhone because AT&T's coverage for our area was worse than pathetic. Suddenly, about 15 days ago, AT&T swallowed up the dominant GSM carrier in the region and there was suddenly full coverage.
I immediately got the iPhone, sold my jailbroken Touch on ebay (for a nice profit) and did a jailbreak on the iPhone within hours of buying it. As someone who faced your dilemma I can honestly say I am much happier with the iPhone. Sure, I took the cancellation hit from Verizon but the benefits far outweighed the liabilities.
With the Touch I quickly discovered that I was using the post-jailbreak apps much more than I ever thought I would. I ran into the issue of having long periods where I wasn't around any wi-fi to use it and having to fall back on the clunky browser of my LG. It was very frustrating.
As soon as I did the iPhone swap I was really enjoying the seamless nature of having data services available to me all the time. Yes, EDGE is much slower but, unless you were paying through the nose for EVDO, the speed is very similar to the Verizon 1x network. That's fine with me since I hacked my LG to run off the Verizon 1x for free and not pay all the extra service fees that they stick to you for everything under the sun (email, browser, ringtones, etc.)
Yes, the cancellation fee is high but the benefits of the cost of the AT&T plan far outweigh the cost of similar services through Verizon.
My only negative has been the worry I've had all along about having a merged device. Using the iPhone heavily does take its toll on the battery. I always worry about getting the battery down too low and end up needing it as a phone with a nearly dead battery.
Also, keep in mind that there's an issue with devices such as the Griffin iTrip Auto. Those devices will charge and play the iPod through the car radio off the sync connector. They work just fine with the Touch but not with the iPhone. I was bummed when I discovered that. The Apple Store doesn't presently list any devices at all in this category. I hope this gets taken care of soon.
