It’s because Colorado water law is based on ‘prior appropriations’.
Colorado was settled around mining and ranching, both of which can be water-intensive. It’s also a fairly dry place. Water rights have been serious business for a long time.
So the rule was that the first person there had the right to start using river water for their mine. Then, if a second person starts a mine upstream, they had the right to use river water only inasmuch as it didn’t impact the prior downstream mine. If there was a drought, the upstream mine had to use less water so the earlier mine wasn’t impacted. Rain barrels were prohibited because that water “belonged” to some downstream rights holder, just as using the water from a stream might be prohibited because it belongs to a downstream rights holder.
This isn’t really late-stage capitalism. The law in Colorado goes back to some court cases in the 1870s and 1880s.
It’s unfortunate that you have like four up votes for explaining the actual History behind it but the guy who just thinks it’s an issue that popped up ten years ago has dozens.
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