Your on the right track. The EGR keeps the peak combustion down, thus limiting NOX emissions. Depends on the kind of test they will run on the car. If it's a "load test" you WILL fail. If it's just a standard sniffer test, the question remains: Will you pass without it? NOX is directly linked to high combustion temps and is one of the primary things they look for in a smog test. Retarding your timing just for the test may be the solution if you don't have an EGR. But I would be surprised if the "tech" didn't spot the fact that you DON'T have one and fail you for that without even running a test.
EGR WILL decrease performance.
Ernie