In order to do better than a level of spell progression you need to receive something broken in return, because nothing balanced is better than a spell level. Which means the 'all PrCs lose a spell level' is a broken metric for making PrCs - either they're useless and never taken or broken (which we're trying to avoid). You'd have to redo the entire casting mechanic to fix this problem. Its inherent to the way Vancian casting works.
Lets try a different tactic - propose a PrC that would be worth losing a CL for which wasn't broken.
I disagree, and point to the relationship between Dread Necromancers and Pale Masters as proof. Dread Necromancer 20 vs Dread Necromancer 10/Palemaster 10 vs Dread Necromancer 18/Palemaster 2 is a hard decision to make. PM loses a caster level at level 1, but gives you component free Animate Dead at level 2, which is extremely useful for a necromancer who has as many undead available as a DN. It also gives you some characterful abilities that are a lot of fun (punch someone so hard they die and raise again as a zombie). But none of those options are broken... it just depends, flavor wise, on what you really want to do. I think it's totally balanceable. And that's actually how it is right now.
I've actually never seen a DN in play. Seriously. By the time it was out my group was already tinkering with the rules so much we didn't want to deal with new probably poorly balanced base classes. And for the sake of argument I'm not going to go review it in great detail now, so I'll conceed that one, but its a somewhat empty concession. I'm guessing the DN 9th level spell list must really suck (I suppose I could go check).
And for an easy fix, all PrCs fail to advance casting at level 1. If they already didn't advance at some level (but did at level 1), they now gain casting at the first level after level 1 where they wouldn't have had it (so, for example, Mindbender would advance at 2, 3, 5, 7, 9 instead of the current 1, 3, 5, 7, 9). Classes that would advance at all levels now advance on 2+. Of course, this does nerf the Mystic Theurge, which is a crying shame. Not sure what to do about that other than say "go play an Archivist." Still, this means PrCs for casters are far less of a no brainer, including on Sorcerers that otherwise would always PrC out without question. It also slows down the crazy dip classes like Mindbender. Mindbender would still be worthwhile... 100ft telepathy and ability to use Mindsight is awesome for a Beguiler. Is it worth losing a caster level? Well, that depends if you wanted to be a stealth/scouting Beguiler or something else. So, it's now a character flavor decision instead of a raw power decision. Give up your general ability for a great specific ability. Isn't that what PrCs should be?
Mindbender's problem is not that its a good PrC. Its an awful PrC. But its an amazing 1-level dip. The fix is to rebuild the entire PrC with abilities a caster might actually care about, and move telepathy to 5th level - which may well be the capstone ability (5-level PrC). If it lost a CL on top of that it would be crap.
I think you'll find most PrCs are underpowered if you do this. Seriously underpowered.
Consider this, you are delaying every future spell level by one level. You are losing out on about 4 new spells/day *right now*. You are decreasing the effectiveness of all your spells *right now*. And you expect some class feature to be worth that?
-----------------
Suggestion: Maybe we should separate Caster Level from Spell Progression. I'm actually a big fan of defining CL = character level. This makes multiclassing work, at least somewhat, for caster/non-caster base class pairs.
(Also, every instance of 'class level' redefined as character level or character level/2 as appropriate).
--------------
Re: Dread Witch
Ok, here's an ability by ability analysis, cause I actually own that book and its only a 5-level PrC.
Qualifying: Will +4, 3 ranks Kno(Arc), Cause Fear, Scare: Entry as a 4th level wizard or sorceror, probably sorceror..
Must have failed a save against a fear effect: What the fuck is this - hey cleric, cast a fear spell on me so I can qualify!
Favored will, crappy BAB, par for the course.
Spellcasting: 4/5
Master of Terror: +2 intimidate, whatever, you're a wizard, that means absolutely nothing...
...+1 DC fear spells. So, if you blow two feats on SF:Necro you can get +3 to save DCs for a very small number of spells with generally unexciting effects - wouldn't you rather be casting Glitterdust?...
...and +bane +doom to 2nd level spell list. Those two spells are marginally useful... Except you don't *know* them, you just add them to your spell list. Ie, mildly inconvenient if you're a wizard, never used if you're a sorceror (and I'm having a hard time convincing myself the wizard bothers to learn them).
Unnatural Will: Cha to fear saves... lets just ignore the fact that *Protection from X* makes you totally immune to fear effects because they're mind-effecting why don't we...
Absorb Fear: So, if you're lucky enough to get something to use a fear effect on you, you get bonus caster levels. Sorry, correction, you get your party mate to cast a fear effect on you (to which you're immune because of Prot from X), and always get +3 CLs... Um... broken? Can you say Blasphemy abuse?
Fearful Empowerment: Hey, you actually get to use that +fear DC ability on something... But 1/day (-> 2/day at 5th level), seriously? Ugg... I hate that mechanic. Almost cool. This PrC might actually be good if it made all your spells have the fear descriptor (or all spells with a "visible manifestation").
Delay Fear: Why god why?
Greater Master of Terror: Another +1 Fear saves... ho hum. And effect creatures normally immune to fear. Hey, that's almost cool, if fear did anything you even remotely care about at mid-high levels...
Horrific Aura: Seriously, effects creatures of 6 or fewer HD? DC 10 + 5 (Class level) + cha mod? Crap.
Reflective Fear: Useless. You never make saves vs. fear - you're immune. Even when you do get to use it - Will is favored for virtually everything that causes a fear effect. You also don't get to use your +2 DC for fear stuff on this, because its not your effect.
I don't understand why it lost the caster level. Except for the CL shenanigans part, that leads to crazy town with spells as they are at present. Seriously: You, a wizard cohort, and an Ioun Stone get to Blasphemy stun-lock everything not immune starting at 13th level. Congratulations, you broke D+D. Of course, you were already chain-binding efreeti before that, and so forth... and lets not talk about the artificer...
I'm sure there's some utterly amazing Fear spell in some splatbook that I'm overlooking. Its probably too good anyway, so we're going to nerf it or delete it from existence. And that makes me care about this PrC even less.