When San Francisco’s human rights regulators demanded that the Salvation Army provide domestic partner benefits in 1998, the nation’s largest private charity responded by giving up $3.5 million in municipal contracts. “It will take longer to change [our policy] than it will for Christ to come,” Salvation Army Captain Debbi Shrum told the San Francisco Chronicle.

As President Bush pushes his faith-based initiative bill through Congress, the Salvation Army figured it was easier to change federal law than its practices. An internal report leaked to the Washington Post disclosed a deal with the White House. If Bush supported an administrative regulation providing religious charities immunity from state and local anti-discrimination laws, the Salvation Army would throw its considerable weight behind the bill.

This Tuesday, the White House confirmed it was indeed considering the policy change. After a day of outrage, the White House decided not to pursue it, claiming that the bill under consideration allows religious groups to hire and fire whomever they see fit. The "Charitable Choice" bill, reads a White House statement, already ensures "that religious organizations have the right to hire individuals who share their religious faith. They also ensure that such organizations comply with civil rights law.”

Simple translation: The proposed change is as dead and buried as any issue ever is in Washington.

But the underlying issue remains: If government sends taxpayer money to primarily religious organizations to provide social services, can it insist they adhere to non-discrimination laws? And if the federal government makes it a national priority to fund such groups, should it provide them with a federal discrimination shield against localities that, unlike the federal government, prohibit discrimination against homosexuals in employment and other areas? (This latter question is what prompted the Salvation Army's aborted campaign.)

“[The desire for federal preemption] is incredibly ironic in light of the commitment by the Bush administration and others to state and local ability to enact laws and govern their own issues,” says Elliot Mincberg, vice president and legal director for the People for the American Way, a liberal advocacy group.

Conservatives are lining up for battle on both sides of the faith-based initiatives bill making its way through the House. But they tend to agree on the importance of religious organizations remaining independent of state regulation, especially involving hiring decisions.

“What we have is a conflict of rights,” says Michael Novak, a religion and philosophy scholar at the American Enterprise Institute and a longtime advocate of faith-based charity. “The religious institutions have a right of the free exercise of their religion to run their institutions by their rules. On the other hand, you have the right of people not to be discriminated against in public settings. So that’s where the rub is and it seems to me that in this case the religious liberty has to triumph because there’s no 'right' to work in these institutions.”

Fair enough. But these institutions don't have a right to federal, state, or local taxpayer money. Traditionally under civil rights law, religious groups were allowed to discriminate on religious grounds, so long as they were spending private money. If they took federal money, they weren’t allowed to discriminate in the programs that use the federal funds, although they can still do so in other areas. Building on a provision in the 1996 welfare reform law, President Bush wants the religious exemption to apply to all hiring. And, as expressed in the bill that passed the House Judiciary Committee in late June, he wants religious groups to be able to compete for grants in just about every social program, from child care to senior care.

“The Salvation Army situation illustrates the inherent and insoluble dilemma in the conflict between the interests of private religious groups in maintaining their religious integrity and the interests of the public in ensuring accountability and civil rights protections when it comes to federal funds,” says People For the American Way's Mincberg. “I think it illustrates this, it underlines it, and it shows there is really no good solution to that problem with government funding of religion.”

No solution, that is, except the obvious one: Don’t fund the programs in the first place. The Salvation Army had that one figured out in 1998.