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Separation of church and state.
No separation of church and people. A vote was taken by the people.
The state didn't refuse it. The people did.
The State is the government (on all levels). The City Council, which is the leadership of a local government entity, voted against the applicant without discussion which makes me believe they arrived at their decision prior to the public hearing. Based on the article, as limited as it is, they didn't provide a legal basis for their decision. I'm surprised their legal counsel didn't advise them to at least discuss the application. They've needlessly exposed themselves to litigation.
Good for them. Cities have the right to deny permits to religious institutions.
Based on building permits and fire exits and parking and suchlike, yes. Based on the religion in question? Nope.
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