Hi LE,
Like what you've mentioned, this could be more of a problem with the touchscreen than with the Pen. I understand that you have tried to restart the app, the service, and even the Surface itself. However, there are a number of other troubleshooting that we would have to perform to rule out the issue and resolve the problem. Please try the listed suggestions on this page. For Solution 3, download and install the Surface Diagnostic Toolkit instead. It will be able to get the latest updates and find other possible software issues. Proceed with the next steps from the page afterwards.
Before proceeding with Solution 9, boot into the Surface UEFI. Simply shut down your Surface, then press and hold the Vol + button and press and release the power button. Once in the UEFI, place your finger and move it across the area that does not recognize the Pen input. Check if the cursor will appear and move as you slide your finger in the affected area.
If the cursor does not appear, it means the problem is the hardware. It will be best to get a replacement for your Surface. Please contact Microsoft Support or take the device to a Microsoft Store for assistance in getting a replacement.
If the issue is not present in the UEFI, you could proceed with the next suggestion which is to reset the Surface using a recovery image.
Kindly update the post so I'll be able to help you further if needed.
Regards.