About Icelanders using this system as a method of protest against anti-Muslim nonsense coming from a leader of the Reykjavik Progressive Party chapter.

I don't know if they've changed things recently, but Britain has supported the Church of England with tax money, some of the Scandinavian countries have supported their Lutheran churches, I think the Netherlands supports the Dutch Reformed Church, and some southern European countries (like Spain and Italy) give tax money to the Catholic Church. Some of the Eastern European countries, such as Greece and Russia support their own Orthodox churches and I think some countries support more than one church with taxes. So I'm not surprised Iceland does this.

In the past, Mexico and many South American countries have given tax money to the Catholic Church. I'm not sure if Canada, which has the United Church of Canada, does it. This seems weird to us in the USA, but it isn't so unusual across the globe. I'm not an atheist, but I'm not affiliated with any formal religion, so I wouldn't like my money going toward any church or primarily religious organization, but I think some of that goes on. Some of these "charities" our taxes support do a lot of proselytizing. It's not a good idea for government to financially support any private charities, either, but there might be some notable exceptions to that rule.