I would say the decline started at Sonic Adventure 2. Sonic Adventure 1 gets a pass because it was Sonic's first real foray in to 3D and a degree of experimentation to "figure things out" is to be expected.
Sonic Adventure 2, however, marked the introduction of a lot of bad ideas that went on to pollute the franchise for many years to come. Less creative, certainly. What was normally a selection of unique enemies became a series of generic police robots. Shadow the Hedgehog had "cliche anime doppelganger" written all over him. The story was when Sonic tried to be melodramatic and "mature" in earnest. Game mechanics reheated from the first game actually had features removed in SA2, making it more frustrating and tedious to play. And despite all the complaints of six characters "stealing the spotlight" in the first game, Sonic Team instead decided it would be a better idea to ignore those, even at the expense of characters in SA2 being useless (why is Knuckles in this game? If you follow the storyline he basically doesn't do anything of value until the last minute - he's just there to be there, with his stupid emerald shard hunts).
It was downhill from there. Sonic Heroes was worse than Sonic Adventure 2. Shadow the Hedgehog was worse than Sonic Heroes. Sonic 2006 was worse than every bad Sonic game combined.
There's a tangible, somewhat indescribable "feeling" you get from games sometimes, of a heart and soul. Almost as if you can tell whether or not the developers really cared about the end product. Sonic Adventure 2 was the first time I felt the series lacked that feeling. I didn't get that feeling from Sonic Heroes, or Shadow the Hedgehog, or Sonic 2006, or even the Sonic Advance games. It's hard to pinpoint what exactly makes up this "feeling", and what triggers it does vary from person to person. I did, however, get that feeling from Sonic Unleashed (360/PS3), even though I didn't really expect to.
Sonic 3 and Knuckles may have made a lot of divisive decisions regarding level design and such, but I'd hardly call it a decline. S3&K was the game me and my friends played obsessively all summer - and even though I might be a Sonic fan, they clearly were not.
Edit: For the record, I don't think Sonic 3D Blast and Sonic R would count as any signifier of a "decline", because they were spin-offs.