Yeah, I agree, but I imagine the complexity of PPC->68k context switches made it undesierable
I disagree here. The worst case scenario is a 68K->PPC->68K context switch per frame, assuming something changes on screen each frame. This would of course, depend on having all drawing operations accumulated in the fast ram buffer and invoking a chip ram update only on refresh, but again that is doable. Most WarpOS/PUP games already have worse switching overhead than that.
Secondly, a smart implementation would evaluate the amount of work required to update the screen (in terms of pixels requiring conversion). Below a certain threshhold (user tunable) it would stay purely 68K. The PPC would kick in where larger areas need modifying.
Regarding the low colour thing, you might be better off using the web 216 palette, since it basically gives 6 levels per gun, which is better than any bitwise aportioning of the space.