I somehow messed up the code.
Here's the correct version.
<ul id="category_list">
<%= render :partial => 'category', :collection => @categories %>
</ul>
<p id="add_link"><%= link_to_function("Add a category",
"Element.remove('add_link'); Element.show('add_category')")%></p>
<div id="add_cateogry" style="display:none;">
<% form_remote_tag(
:url => {:action => 'new'},
:update => "category_list",
:position => :bottom,
:html => {:id => 'category_form'}) do -%>
Name: <%= text_field "category", "name" %>
<%= submit_tag 'Add' %>
<% end %>
</div>
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