Lukemac, I am not familiar with this particular test, but I am familiar with attempting to navigate the gnarly road of advocating for kids using test scores

Try to gather all you can about both the actual test and the circumstances that may have been an issue that could have explained the scores your ds got relative to his other tests. Then look at your options for advocating for entry into the program.
A few thoughts on the tests and scores:
1) The WJ-III subtests might not test exactly the same set of skills. I don't have time to look back at the WJ-III subtests this morning and make the comparison, but that's something you can easily google.
2) What age was your ds when he took the WJ-III achievement tests? It might be possible that part of what you're seeing in the "drop" in percentile scores is somewhat due to other young children's reading ability improving between 5-7 years old relative to each other. Not all kids are fluent readers at age 5-6, not even all EG kids, so there are going to be gifted kids out there who move up in percentile on reading achievement tests, which means other kids are perhaps going to move down. Nothing about that says your ds lost reading skills, just that the overall relative skills of the control group he's being normed against have come up.
3) How were the answers recorded? Did he have to fill in a bubble sheet or did he answer in the test booklet? At 7, I'm guessing he had to answer in the test booklet, but if he had a bubble sheet, it's possible he might have made errors in transferring the answers.
Re what to do next to advocate for placement in the GATE program: his teacher has said no, and chances are she's not the first teacher in your district who's said no for an obviously gifted student. This is one test and one teacher vs the bulk of evidence of giftedness you have for your ds (test results, work examples, your personal anecdotes of his giftedness). Take what you have as evidence to the staff of the GATE program and discuss the difficulties you've had getting the teacher's recommendation. An appeal to a different gate-keeper may be all you need. If that seems to be going south, it never hurts to *then* get frustrated and bring up the "You're denying gifted services to a kid with an ___ IQ????" (btdt lol).
Good luck!
polarbear