Pretty sure it's specifically tied into the apostrophe being in the Text or Value field assigned to the SelectListItem. If you replace the GetCategories() method with the method below, it works fine, but as soon as you put an apostrophe in one of those fields, you get the error. If you look at the error generated, the apostrophe is being escaped as a "'" character, and I think the # character in that sequence causes the problem because that is a special character in Kendo when binding to data. I'm guessing it is part of the Kendo framework that is doing the escaping, because if I put the same dropdown by itself in a view, the select tag helper doesn't escape the apostrophe.
List<SelectListItem> a =
Using a regular HTML DropDownListFor TagHelper instead of the select tag helper causes the same error to occur. I can get it to work using the Kendo DropDownListFor TagHelper, but I'd prefer to not have to use the Kendo dropdown. If you could let me know when this gets resolved, I'd appreciate it.