Suppose Ambuscade deals 3 irreducible damage to Nightmist.
Blighted Streets in play, 3+1=4.
Nightmist with Amulet of the Elder Gods discards 2 cards and redirect the damge back to Ambuscade.
Since redirection occured, static modifiers are removed and re-evaluated. But hey, damage dealt was irreducible. So, 4 damage was dealt to Ambuscade. Right?
Now, suppose it was not Blighted Streets but Obsidian Field instead.
Ambuscade deals 3 irreducible damage, which is increased to 4. Nightmist redirects back to Ambuscade. Static modifiers tried to be removed but can't be removed, so damage stays at 4. Static modifiers re-evaluated, now is the damage increased to 5?
Removing a static modifier is not the same thing as reducing damage. If damage is changed so that an increase no longer applies to it, then it loses the increase whether it is reducible or not.
With blighted streets Ambuscade would take 3 damage. With obsidian field he would take 4.
I only apply damage modifiers that depend on the target once I know for sure the final target of damage.
What I do is:
calculate damage done by Ambuscade, with only the modifiers that depend on him ( bonus to damage dealt by and so on) and so are always counted, whatever the target,
determine the target of the attack and eventual redirections, based on the above damage value,
only then apply modifiers that depend on the target ( damage taken modifers, damage dealt to, and so on).
However, this is how I do it (*), and the step by step process I chose because of this kind of problems, not an official ruling.
(*) : well, it is the simplified version of the step by step process I use, anyway.
It's part of the assumed definition of a static modifier. It's not necessarily a situation of having them apply and then having them unapplied so much as it is if the conditions are favorable, the modifier is applied, and if conditions are unfavorable, the modifiers are not applied. Whenever something wants to check what the damage is, it starts with it's based, then checks any static conditional modifiers to see if they apply. Something of an "immuteable value." The damage itself doesn't really change, it's that whatever type/value pair was at one time is no longer valid when checked later, so it's discarded, and a brand new value/type is generated based on what the conditions are now.
I don't know of any official source that states it directly. It's just the general idea that if a card says "Reduce damage dealt to Tempest by 1", then it only reduces damage dealt to Tempest, and not damage that was aimed at Tempest but got redirected to Legacy. Depending on the specific cards, this can make more or less thematic sense, but it generally seems like the most reasonable way to play the game.
An indirect official ruling was made by Adam in the topic "Imbuied Fire vs Cramped Quarters Combat," where Adam stated the effects "Increase fire damage by 1" and "all hero damage is fire damage" are static, and are not activated by some trigger, but rather are both in effect at all times (until the card is destroyed).