It seems wasteful to subsidize, say, 80% of a transit system's costs with taxes, and only use fares as a means to keep it underutilized.

And in many areas of the USA, I doubt removing fares will push demand past capacity -- it's not the $100 - $200 month in fares that keeps most people in a car that may cost them $700/month or more. [1]

[1] https://www.nerdwallet.com/blog/loans/total-cost-owning-car/