Joshua,
I know that you're (for lack of a better term) playing devils advocate (this is a compliment) here and I (we) certanly appreciate a look at the potential cons of this mod.
X-cart already has the ability to place the product name in the alt tag. This mod only adds the appropriate category name to that tag. As far as users with images off seeing long lines of text, this is not the case (unless your cat names and product names are super long). By xcart default, the user would see "Widget" in place of the image. With this mod, they would see "Utilities Widget". This surly is not a long string of text.
Also, It's hard to say exactly what search engines consider as alt text spamming. I don't see this as spam because it's _relavent_ to the product and category. However, if the mod was set to trick or deceive by producing reslults like "FREE Cellphones Widget", where "Free Cellphones" is not related to "Widget" at all, then I could see a problem with spamming.
Piper