Is there anyway to create blocks based on taxonomy?
Yes. Taxonomy_dhtml and taxonomy_html modules do this, for example. Those modules live in Contrib.
Is there anyway to set blocks are displayed based on the user?
Yes, users may choose to show 'custom' blocks if they wish. See block documentation - http://drupal.org/node/view/296
Is there anyway to control set permissions on blocks or taxonomy?
A custom module can choose to show blocks based on a permission. Taxonomy isn't yet designed with permissions in mind beyond who is a taxonomy admin and who is not.
