I agree that the song is clearly about a split between former friends. It is possible that the break-up in question is between between songwriter/bandleader James Mercer and their original bass player, Neal Langford.
falling out of the van
The Shins original touring vehicle was a van.
they ought to drown him in holy water
Neal Langford went to a Catholic high school.
These are the muddy waters / I'm swimming to make a living
That I might drown in them should come as no surprise
James and Neal were friends before they were band mates, and the professional realities of operating a successful band necessitated a difficult decision. Here, James recognizes that the business aspect of the music business isn't pretty, and that the decision for Neal to leave could cost them their friendship even if it doesn't result in success for the band.
I agree that the song is clearly about a split between former friends. It is possible that the break-up in question is between between songwriter/bandleader James Mercer and their original bass player, Neal Langford.