Your idea of using fuel taxes to subsidize higher efficiency vehicles and mass transit is an intriguing idea and one deserving of consideration and careful analysis. However, although this brief response is not a subsitute for detailed analysis, please let me point out a few issues for consideration:
1. Mass transit, although certainly an essential part of an overall national transportation policy, has a number of limits. For example, mass transit is best suited to large urban and suburban areas. London (or New York) is a perfect example. However, many people live in smaller cities and less densely populated areas. In such areas, although there may be some public bus service, mass transit is not going to be able to meet the needs of many people. Furthermore, the average income level in these smaller and/or more rural areas is often lower than in major cities. Does it really make sense to raise taxes on a real estate sales agent (or grocery clerk, etc.) in Iowa in order to increase to transportation subsidies for a stockbroker in New York?
2. Mass transit is best suited for point-to-point commuting, such as home to office and back. However, famlies are increasingly faced with more complex transportation patters, such as home to day care to work to day care to soccer practice to shopping, etc. Mass transit is not practical for many of these more complex commutes. Higher fuel taxes would thus work against many working families.
3. Manufacturers are responding to the market demand for higher efficiency vehicles by producing an array of hybrid and other innovative vehicle options. Furthermore, these new vehicles, which are starting to come on the market, will be available in an increasing number of sizes and models in the next couple of years. These advances are taking place without new taxes and subsidies simply because the market is demanding them. Experience has shown that advances in vehicle options and technology driven by market demand are going to be far more efficient and better meet consumer needs than those options and technologies mandated by the government.
4. Increasing subsidies for more fuel efficient vehicles may be useful to some middle class and upper middle class consumers (assuming that those vehicles qualifying for the subsidy meet their needs). However, even with significant subsidies (other than near-100% subsidies) those new vehicles will be out of the economic reach of many lower income consumers. Thus, the result of higher fuel taxes could well increase the taxes on the working poor in order to subsidize new cars for their better off neighbors.
Overall, you certainly raise an important issue with respect to increasing fuel taxes, but it does need careful study. I look forward to learning your views.