After some testing, this is indeed a Pylance bug.

def foo[A: (int, str)](x: A, y: A) -> A:
    if isinstance(x, str):
        reveal_type(x)
        reveal_type(y) 
        # Type of "y" is "A@foo" (Pylance)
        # Revealed type is "builtins.str" (Mypy)
    return x + y

Thanks @dROOOze.