Best practice for using location names as part of taxonomy?
It depends of your goal: 


If you want to cover large areas like cities, it's better to use Taxonomy as it will be easier to build (for example) a view (or map) of all node from this city.
If you want very precise geolocation (like the position of a store in a map), then go for location. Regarding Location module, it may be overkill for simple Lat./Long. positioning and a simple CCK field for each should be enough.
You can of course have both Taxonomy and Lat./Long. for your nodes and use the one appropriates regarding your context.


If you have time, I'll recommend the listening of Acquia Podcast 22: DevSeed On Mapping in Drupal.


  Being able to display maps in Drupal is a powerful feature, and can
  also be confusing to implement. Join us as we talk with Ian Cairns,
  Tom MacWright, and Robert Soden from Development Seed about how it is
  done and the different options available for displaying great maps.