We have had the American Flag at the side of the sanctuary for years and years and now our new pastor has decided he doesn't want it there, only for national holidays. He really did not give us a very good reason for the change other than saying the flag is not liturgically correct. Is this something new?

Neither the Code of Canon Law nor the General Instruction of the Roman Missal nor any other document of universal jurisdiction mentions the display of a national flag in a Catholic church.  The display of the American flag is not prohibited, but the U.S. Bishop’s Committee on the Liturgy has discouraged the display of the flag in the sanctuary of the Church.  Ultimately, it would be up to the local bishop to decide, and usually he would leave that up to the pastor who should have the best sense of the opinion of the parishioners.
Over the past 15 years during service projects in Mexico I have had the good fortune of visiting the Shrine of Our Lady of Guadalupe. That shrine has a very large Mexican flag in the sanctuary, as well as national flags from all of the nations of the Americas. It reminds me of the Olympics or the United Nations, and given the extraordinary international importance of Our Lady of Guadalupe, the flags seem to fit.
Normally, when the American flag is displayed in the sanctuary, it is placed on the right side of the Church (the epistle side) and the Vatican flag or papal flag balances it off on the left side of the Church (the Gospel side), since the flag of the Holy See takes precedence in the Catholic Church over our national flag.
While patriotism is a great virtue, it is important to remember that the flag is a symbol, a symbol loaded with different meanings for different people at different times.  There was a time when we could proudly and clearly pledge our allegiance to that flag which represented “one nation, under God, indivisible, with liberty and justice for all.”  That statement is no longer true since the fateful Supreme Court decision  legalizing abortion.  Now it is “with liberty and justice for some.”  Once we restore the full and original meaning to that flag by assuring “justice for all”, we can proudly present those colors in all the sanctuaries across the land.