itt: gaffers approve of theocracies so long as they aren't muslim
Israel is not a theocracy. There are many forms of state and religious functions overlapping:
-A state church funded by taxes. Iceland has one for instance
-Head of state is head of the church. Like Queen Elizabeth.
-States with an official religion. This is where Israel comes in although 'Jewish' can be both ethnic and religious and it's not clear what it is. Syria and Egypt for instance clearly identify themselves as both ethnic (Arab Republics) and religious (islamic) states
-States where religious law is part of or entirely in state law. This can be shops having to close on sunday or the death penalty for blasphemy.
-States where the government is wholly or partially run by religious clerics. This is a the basic theorcracy and there are only The Vatican, Iran and the Tibetan government in exile that fit that description.
When it comes to Jerusalem it's useful to compare the access provided to the holy places by Jordan and Israel. Compared to the zero access allowed by Jordan to any Jews the Israeli policy is very accomodating.