After years of struggling with this issue (the Desktop item kept reappearing in Favorites in Finder whenever I entered About this Mac > Storage), I found a way to fix this.
It may not be suitable for regular users, as it involves using the command line and external utilities.
- Install a sidebar editor called mysides using Homebrew (brew install mysides).
- Run "mysides list" in Terminal and check it shows an entry called "Desktop".
- Run "mysides remove Desktop" in Terminal.
- Check that the Desktop entry has disappear from Finder's sidebar and that "mysides list" also doesn't list it.
- In my case, open "About this Mac > Storage" (which triggered Desktop appearing again in Finder's sidebar) and verify that Desktop doesn't appear again.
I rebooted a few times after running this steps just to check if the fix was persistent across reboots. It's been a few hours since then and Desktop still hasn't appeared, so it seems this was the fix we all needed.
I believe Finder has some bug when deleting the Desktop entry. Maybe it doesn't delete the entry because it was never supposed to be there (as it should only appear under iCloud Drive if this Desktop & Documents is synced through iCloud). With mysides, the entry seems to be removed correctly.
Hope this helps!