I'm still trying to figure out how or why a govt has the authority to make a person water or not water their private property.
Yes, I know it's not a libertarian idea, but:
1. Many cities have been built in excessivly arid areas, or at least outgrown their native water supplies
2. Reservoirs only hold so much, you can only pull so much water from rivers without massive ecological damage.
3. Water is necessary for life
4. Water is pretty much necessary for modern sanitation levels.
5. Of all the things to cut water usage down on, watering your lawn is one of the easiest to cut out to save large amounts of water. Many such areas also have car wash bans, but that's marginal.
During droughts, it's prudent to limit your water usage.
Personally, I'd simply offer the first 2k or so gallons for the cheap 'poor people have to drink too', and gradually ramp it up to 'You might as well water your lawn with Evian'. Assuming that the water company is either publicly owned or a coop or such. Offer some rebates or such for people to swap out water-inefficient appliances with water saving ones.