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For a tax to be effective for such a purpose, it has to be avoidable. They have to actually make a small car. But the CAFE standards as they currently stand prevent them from cheaply producing a CAFE compliant small car. So nobody gets the tax break on the small car, because there are no small cars to be had.
The tax approach cannot be achieved until the CAFE standards are fixed, but once we fix the CAFE standards to favor smaller cars, the problem solves itself.
CAFE works by requiring a certain percentage of the total number of a manufacturer's vehicles to comply. Small cars are currently non-compliant. Only big cars are compliant, so they need to sell more of them. When we correct CAFE standards to favor small cars, they will need to sell small cars, and their marketing departments will get to work at adjusting consumer demand.
If it's cheaper to produce a small car because of the tax, then the tax is effective. Making the bigger cars more expensive incentivizes the smaller cars.
Taxes, fines, and regulatory fees in economic theory are supposed to represent the costs incurred by the general public (in this case the environment as well as infrastructure maintenance) being paid by the parties responsible. This often is not the case in practicality, such as the costs to reverse methane emissions not being covered by the fines associated with flare stacks.
If the companies can't produce cars cheap enough then they'll have to raise the price. If less people can afford cars, that's fine, then more investment will have to be made into public transport, bike lanes, and walkable communities. I do not see any downsides to a tax on larger vehicles.
It is not cheaper to produce the small car. You're not quite understanding this.
The small car does not comply with the perverse CAFE standards. The big cars do comply. If they sell too many of the efficient, but non-compliant small cars, they get penalized. That penalty greatly increases the cost of producing the small, non-compliant car.
Without CAFE standards, your argument is reasonable and valid. With the asinine standards currently in place, your argument is completely irrelevant.
Do not sit there and tell me that it's impossible for a small car to comply with standards. That's ridiculous. Charge them extra for selling a big car so that making a big car is more expensive than creating a small car. You can't just say that this is impossible and deny the obvious solution, this is the clear solution.
Clearly, you do not understand the problem with how CAFE standards are currently implemented, because that is, indeed, the case. The mandated reductions on small cars are too much, and the mandated reductions on large cars are not enough. Manufacturers did the math, and the most feasible solution was to increase the size of cars. Cars are proportionally wider now than they used to be, to maximize their footprint and bump them up into larger classes.
Manufacturers will do anything they need to to avoid violating CAFE standards. With current regulations, that means "sell fewer small cars". If we try to solve the problem with taxes on large cars, manufacturers will simply increase the MSRP of small cars. Add a $5000 tax on large cars, and they will add $5000 to the sticker price on small cars, or otherwise ensuring the large car remains the better value.
Correct the regulations so that smaller, intrinsically efficient cars are feasible, while forcing manufacturers to go to extraordinary efforts to continue manufacturing large cars, and the problem solves itself.