What is the best way to handle this?

I'd say "no". If you reward crappy behaviour, you get more crappy behaviour.

yeah, it sounds like he owes you a personal favor...

No. You shouldn't do personal favors your boss unless you are/were already friends.

Do you want to do the favour? If not, don't do it. If so, do it. Personal favours are unprofessional, IMO.

I didn't do it, and even though it might be a moral victory I'm sure it will have long term consequences.

Maybe. Maybe it just establishes yourself as a person of character.

Agreed. For that matter why would you do a personal favor for your boss or a co-worker unless you are friends? It hasn't anything to do necessily that you feel you were unfairly treated. A personal favor is something you do for some one that you have a personal relationship with.

If he asked you, I would simply say, I would love to help you, but I prefer to keep our relationship on a professional level.

i'm guessing the personal relationship, if there ever was one, ended after the demotion occured...

Well it was "sold" as a promotion with a very meager raise but in fact it's just doing the grunt work for the sales staff so they can play more golf.