The city's mayor, Nir Barkat, said the municipality was due $186m in uncollected taxes on church properties.
The proposal to levy taxes on some properties would run contrary to unofficial historical tax-exempt status the churches have enjoyed for centuries, the leaders said describing the legislation as an attack on Christians in the Holy Land.
Under a 2013 agreement signed between Jordan and the Palestinian Authority, King Abdullah II is the custodian of the Muslim and Christian holy sites in Jerusalem.
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Commercial buildings are not exempt from municipal taxes (arnona), regardless of their ownership.
The Israeli parliament on Sunday agreed to hold off discussing the legislation to "ease tensions with the church leaders and find a compromise". The Greek Orthodox Church owns most of the lands in the West Jerusalem and also some lands in East Jerusalem. The churches say that while the settlers' actions clearly contravene Israeli law their crimes go largely unchecked.
Included in the Hebrew edition, but not the English, is the municipality's response, along with the fact that the tax does not apply to houses of worship, but only church-owned property used for other purposes.
Churches fear the expropriation bill will make it harder for them to sell their property, the proceeds of which are vital to church activities. He said churches have property, which they lease and pay taxes, but with the latest decision the authorities want to impose tax on churches and temples, as well, which is unacceptable.
In an open letter published earlier this month, the leaders of 13 churches, including the Anglican Archbishop in Jerusalem, the Most Revd Suheil Dawani, argued that this contravenes the historic understanding between the Churches and the civil authorities.
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"This reminds us all of laws of a similar nature, which were enacted against the Jews during dark periods in Europe", the church leaders said, according to Reuters.
However, the city recently decided, citing the legal opinion of someone it described as an global law expert, that the exemption for churches applies only to properties used "for prayer, for the teaching of religion or for needs arising from that".
"This is a shame, I've come a long way and the church is part of the pilgrimage", said Adam Lowe, a university student from London.
Hamas spokesman Fawzi Barhoum said the move comes as an upshot of the US President Donald Trump's decision to recognize Jerusalem Al-Quds as the capital of the self-proclaimed Israeli regime.
"Betraying worldwide treaties and centuries of practice, all Christian properties, except churches themselves, are being taxed tens of billions of dollars. We have hundreds of pilgrims and tourists that have arrived here to see it and are deprived of the opportunity to pray in the church today", the Chancellor said.
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