I'm not sure what the reasoning is for the particular restrictions they put on size. However, if a city council (or whoever) wants to write code based on safety, then they should be citing a study or something vs. "this looks unsafe". Unless they are flying it in a hurricane, I wouldn't think a giant flag could travel very far if it broke loose. But then I'm not an expert on giant flag aerodynamics, lol.
But yeah, they shouldn't be so indignant if this was preexisting law and they knowingly violated it. I mean, what did they think would happen?