Definitely an odd thing to regulate federally. No reason at all why toilets in New Mexico (average annual rainfall 13") and Mississippi (56") should be held to the same legal limit of water usage.
The low flow restriction was criticized at the time for exactly that but I believe the reason it ended up in the bill is twofold: manufacturers wanted a unified standard at the national level that didn't change at the whims of 50 different state legislatures and the bill was geared towards energy conservation, not water usage. Since toilets account for 30-40% of indoor water usage and pumping water around is quite energy intensive, it does have an effect even if you're in a wet region.
