Yes, closing the gap helped clear up the rpm signal. I get a nice clean signal now, but the sensor is very close to the teeth. Maybe .5mm clearance. I had it close enough to rub on one try, so I backed it up just a tiny bit. It seems too close for safe running, but its working. I think my hall sensor is maybe a bit finicky with my teeth design.
On my past megasquirt setup, I ran a Cherry Hall sensor with an aluminum body, and it would run perfect with 2-3mm clearance.