"If it taxed churches, the church would certainly be funding the state, which would arguably be a breach of our constitutional separation of church and state."
There are so many flaws in this argument that if I started listing them I would run out of room and time.
Total stupidity.

Yeah churches are just like any other business. They sell superstition only it has no fixed price just the expectations of donations and large bequests.

Asset rich churches should pay tax
www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10909537

This to me is proof that the church should be taxed.

Catholic church's $1.2 billion in funds.
The Sydney Catholic Archdiocese controls funds worth more than $1.2 billion and has made multimillion dollar annual profits, an inquiry has heard.

In an unprecedented disclosure of the archdiocese's accounts, the royal commission into child sexual abuse has heard the church has extensive property and cash holdings in funds, which are ultimately controlled by the archbishop.

The commission heard the Sydney archdiocese makes payments to victims of sexual abuse by priests from a $426 million "procuration fund".

The procuration fund is part of a complex asset base that includes an $810 million Catholic Development Fund (CDF) which acts as an "internal treasury" to the church.

Sydney archdiocese business manager Danny Casey told the commission on Tuesday that the archdiocese banked surpluses of between $7.7 million and $44 million between 2004 and 2007.

The church during that period eventually spent $1.5 million aggressively defending a $100,000 compensation claim from former altar boy John Ellis, who was sexually abused by Bass Hill priest Father Aidan Duggan from the age of 13 to 17 in the 1970s.

In 2013, the most recent year on record, the archdiocese recorded a $9.2 million surplus and had net assets of $192.7 million.

http://au.news.yahoo.com/a/22157093/catholic-churchs-1-2-billion-in-funds/

Con't

The critical thing which they will not tell you is how much they spent on the charity side of the church?

Simple logic breakdown:

Shelton's assertion is that charity endeavors should not be taxed because they benefit society.

This is sound.

Second assertion: Churches are charities and thus should not be taxed.

Problematic insofar as Churches have both charity and ideological functions.

Simple solution:

Church groups that wish to remain tax free give up spreading ideology and focus on charity endeavors. Churches that agree not to espouse religious teachings pay no tax. Proselytism results in loss of said tax breaks.
It need not be as harsh as it seems, Churches could break off charity arms into separate entities. The public would be able to report on their activities as they can with any other charity. But as solely secular charities, membership on charity boards would need to be just as open to secular people. In time, the religious aspect would wane.

Problem solved. Good day to you all.