I think he did the right thing for the wrong reasons. A town hall is a civic building, owned by the local government in trust for all the citizens of the town. The town flag (if it has one) or symbol or crest belongs there, the state flag, sure, the national flag, no worries. These are all symbols representative of the entire population of the town. But the gay flag doesn;t represent the entire population of the town. It almost certainly doesn't represent a democratic majority. Even if you had a vote and found majority support for flying the flag, how many people would be voting yes not because they beleived in the rights of gay people to fly their flag, but becuae they were afraid of offending someone, or being considered a homophobe?
Realistically, if the guy hadn;t brought up religion, there is no way this would have been news. Councils refuse requests from special interest groups all the time. If the guy had just said "No" and explained that he didn't want to promote one minority group over another, or just refused to be drawn on why, it might have made the local newspaper. Since he brought up God, people care. And probably correctly - when an elected official is doing anything based on what religion says against the will of the people, well, that's aproblem. As I said - right decision, wrong reason.