Many of the water usage laws are actually a result of environmental activism from previous decades. For instance, look at septic tanks. Septic tanks, when properly installed and maintained, are environmentally and economically superior to sewer systems. The problem with septic systems is that most people are stupid and lazy. Many people don't properly maintain them and they end up with blackwater in the drain field. People blame the septic system instead of the retards who were supposed to maintain it.
Greywater re-usage suffers from the same type of regulation even though it is typically less toxic than blackwater.
I would support rewriting or repealing many of the inadequate water usage laws, but don't start throwing blame around haphazardly.