Gems are the de-facto standard for packaging and releasing Ruby libraries.
There used to be two major drawbacks to using gems instead of plugins in Rails applications. Gems did not have access to all the functionality that plugins had. For example, in Rails 2, gems could not directly add rake tasks to your application. In Rails 3, plugins and gems are completely equal.
The second drawback was that gems were harder to bundle with your application. This has been resolved a while ago by rake gems:unpack:dependencies
. It copies all gems your application depends on to your app's vendor/gems
application. If you deploy these with your application, there is no need to install them on remote servers. In Rails 3, the new gem bundler further improves this mechanism. It even allows you to bundle Ruby C-extensions!
Also consider the things that cannot be done with plugins: versioning, packaging, dependency management, extending Ruby, etc.
In my opinion there is no serious reason to use plugins instead of gems anymore. The last advantage of plugins will be void when Rails 3 is released. Spread the word, and help everyone convert their plugins to gems!