Matt, You should read some Dani Rodrik, who has plenty of papers avaialble on his website. One of Rodrik's key points is that prior to the existence of an industry, there are significant costs associated with discovering if that industry will be profitable in a particular place. Once one entrepenuer demonstrates the viability of the industry, however, others can follow at lower risk - in other words the leader provides a positive externality. But, since this means that part of the social return from the entrepenuer's investment cannot be captured by the entrepneuer, we should expect markets on their own to provide a suboptimal level of such entrepenuership. This kind of market failure ("cost discovery") can be solved by subsidizing investments in new industries (though of course, like anything else, these subsidies should be well designed and not poorly designed). Similarly, there are network relationships between different levels of a production chain such that if some "links" are missing, its much more risky to invest at any point in the chain. For instance, it's much more risky to invest in ethanol production if there are not distribution networks in place through which to sell the ethanol. On the other hand, if there are no ethanol producers, it makes no sense to invest in the distribution network. Again, subsidies can help to overcome this chicken and egg problem. Taxes, on their own, would solve neither problem.

Taxing gasoline devastates the working poor and damages the middle class, exacerbating class inequality in this country. For that reason alone it is the last thing we want to do. Matt, I think you problem is you live in a city with good public tranport and just cannot imagine what it's like to live almost anywhere else in the country. A more targeted tax and subsidy policy would make better sense: say, a program that would tax new vehicle purchases involving vehicles with less than a targetted miles per gallon rating (and no "business" exemptions for SUVs!) on a steeply graduating curve while subsidizing vehicle purchases of high mileage cars, also on a steeply graduating curve.

Your argument does not really make sense. If people are not using less gas when the market pushes the price up to $3 a gallon why would they have used less gas in 1995 if taxes had produced $3/gal gas? $3 is $3 no matter where the money is going. It's not like people would drive less to spite the tax collector, but not to spite Arab oil shieks.
No, we are better off attacking the source of the problem head-on, which is not oil, but lack of energy efficiency in our vehicles. The demand for gas is highly inelastic; the demand for Hummers is not. And people are more likely to notice and respond to a four digit runup in the cost of gas guzzlers (and a four digit rebate on fuel-efficient vehicles) than a dollar rise in the price of gas.

Subsidies or Taxes is not the real question, but how much are we subsidizing gasoline’s price and preventing alternate technologies from coming to market.

Also, by subsidizing gas what other products are being "subsidized" by market distortions. The automakers, road construction, recreation industry, real estate, the list could go on.

We pay this subsidy because the politics of today are all about having others pay your expenses.

The cost causer should be the cost payer!
What a novel idea!

If this was cross-subsidization by one entity it would be charged with illegal restraint of trade, but when the tax revenues (borrowing today) does the subsidizing the action is legal.

It is done for the "public good".

So you're saying that Bush policies (domestic and foreign) have achieved the result that economists agree almost universally is best for the conservation of petroleum products and the reduction of harmful emissions -- higher prices? So the policymaking is done, we just need to wait?