And just to be clear, this rule will fork the test blockchain between those running on the current or prior versions of the client, and those running on whatever version this change comes out in, right?
Yes.
Any opinions on whether to do a hard reset (new genesis block with the new rules) or a split ("new rules apply to blocks with timestamps after XYZ") ?
RE: scaling down difficulty: good idea if we were thinking of implementing something like this for the main network. But I'd want to give everybody lots of time to think long and hard about potential hacks/exploits/unintended consequences if this was being considered for the main network-- sudden drops in hashing power is NOT a problem for the main network, so I don't think it is worth considering now.