The most obvious reason to waive DoD disability retirement pay is if the VA disability compensation equates to a greater monthly sum. In many cases, you will simply receive more money by waiving DoD pay in favor of VA compensation. However, it is worth noting that waiver of DoD retirement pay does not extinguish your entitlement to DoD retirement pay.
This issue seems to come up regarding CRSC (Combat Related Special Compensation) benefts. As far as CRSC goes...waiver of DoD disability retirement pay, contrary to what is currently posted on DFAS's website ("To qualify for CRSC you must...waive your VA pay from your retired pay"), has no bearing on your qualification for CRSC. Eligibility for CRSC is premised on your entitlement to DoD retirement pay - waiving DoD retirement pay in favor of VA compensation does not affect your entitlement to DoD pay. Depending on your specific circumstances, it may be better to elect one over the other when considering CRSC, but it is impossible to state that waiver or non-waiver of DoD disability retirement is a good or bad idea as a general rule. The best course of action will vary between each individual.
There are also tax implications to consider, as you stated, DoD disability retirement pay is taxable income. VA compensation is tax-exempt. CRSC payments are also tax-exempt (if you qualify). Again, tax implications are specific to individual circumstances and the best course of action depends on many factors.
Just an opinion, but in the vast majority of cases, it seems that waiver of DoD retirement pay in favor of VA disability compensation is usually the more sensible option. But again, you need to weigh the tax implications, possible receipt of other benefits (e.g. CRSC), and, depending on your personal/spousal situation, the possible divisibility of benefits upon divorce, etc.