The Danbury Baptists were concerned their religious liberty would be infringed upon by state govt officials who did not share their faith.
While problems were few for the DBs, they also recognized this could change at any point because there were no state laws protecting their religion.
So they wrote Jefferson asking if the federal constitution/Bill of Rights might provide them the formal protections they sought. Jefferson told them "no" as the Bill of Rights (at that point) did not apply to the states.
Unfortunately, over the decades, the letter from the DBs to TJ and the letter to them from TJ has been used to claim all kinds of things that aren't true. However, actually reading both of the letters goes a long way towards understanding their meaning.
Jefferson was inaugurated the third President of the United States on March 4, 1801, following one of the most bitterly contested elections in history. His religion, or the alleged lack thereof, was a critical issue in the campaign. His Federalist Party foes vilified him as an infidel and atheist. The campaign rhetoric was so vitriolic that, when news of Jefferson’s election swept across the country, housewives in New England were seen burying family Bibles in their gardens or hiding them in wells because they expected the Holy Scriptures to be confiscated and burned by the new Administration in Washington. (These fears resonated with Americans who had received alarming reports of the French Revolution, which Jefferson was said to support, and the widespread desecration of religious sanctuaries and symbols in France.)
One pocket of support for the Jeffersonian Republicans in Federalist New England existed among the Baptists. At the dawn of the 19th century, Jefferson’s Federalist opponents, led by John Adams, dominated New England politics, and the Congregationalist church was legally established in Massachusetts and Connecticut. The Baptists, who supported Jefferson, were outsiders—a beleaguered religious and political minority in a region where a Congregationalist–Federalist axis dominated political life.
On New Year’s Day, 1802, President Jefferson penned a missive to the Baptist Association of Danbury, Connecticut. The Baptists had written the President a “fan” letter in October 1801, congratulating him on his election to the “chief Magistracy in the United States.” They celebrated Jefferson’s zealous advocacy for religious liberty and chastised those who had criticized him “as an enemy of religion[,] Law & good order because he will not, dares not assume the prerogative of Jehovah and make Laws to govern the Kingdom of Christ.”
In a carefully crafted reply, Jefferson endorsed the persecuted Baptists’ aspirations for religious liberty : Believing with you that religion is a matter which lies solely between Man & his God, that he owes account to none other for his faith or his worship, that the legitimate powers of government reach actions only, & not opinions, I contemplate with sovereign reverence that act of the whole American people which declared that their legislature should “make no law respecting an establishment of religion, or prohibiting the free exercise thereof,” thus building a wall of separation between Church & State.[3]
Although today Jefferson’s Danbury letter is thought of as a principled statement on the prudential and constitutional relationship between church and state, it was in fact a political statement written to reassure pious Baptist constituents that Jefferson was indeed a friend of religion and to strike back at the Federalist–Congregationalist establishment in Connecticut for shamelessly vilifying him as an infidel and atheist in the recent campaign. James H. Hutson of the Library of Congress has concluded that the President “regarded his reply to the Danbury Baptists as a political letter, not as a dispassionate theoretical pronouncement on the relations between government and religion.”
The religious liberty of the Danbury Baptists was already being infringed upon in 1801 by the Connecticut Certificate Law of 1791; which was the primary complaint of the Danbury Baptists in their letter to President Jefferson.
"What religious privileges we enjoy (as a minor part of the state) we enjoy as favors granted, and not as inalienable rights; and these favors we receive at the expense of such degrading acknowledgements as are inconsistent with the rights of freemen."
--Letter from the Danbury Baptists to Thomas Jefferson
The "degrading acknowledgments" were a requirement of the Connecticut Certificate Law. Presented below is John Leland's 1791 description of the Certificate Law.
"The certificate that a dissenter produces to the society clerk, must be signed by some officer of the dissenting church, and such church must be Christian; for heathens, deists, and Jews, are not indulged in the certificate law; all of them, as well as Turks, must therefore be taxed for the standing order, although they never go among them, or know where the meeting-house is.
This certificate law is founded on this principle, 'that it is the duty of all persons to support the gospel and the worship of God.' ...Is it the duty of a deist to support that which he believes to be a cheat and imposition? Is it the duty of a Jew to support the religion of Jesus Christ, when he really believes that he was an impostor? Must the Papists be forced to pay men for preaching down the supremacy of the pope,...? Must a Turk maintain a religion, opposed to the Alkoran ...? I now call for an instance where Jesus Christ, the author of his religion, or the apostles, who were divinely inspired, ever gave orders to, or intimated, that the civil powers on earth, ought to force people to observe the rules and doctrine of the gospel."
--http://classicliberal.tripod.com/misc/conscience.html