People live near KSC and Vandenburg, there are no dangers there. It will be loud when there are launches, but those are relatively uncommon and pre-scheduled events.
IDK about Texas law and process but I assume having an incorporated municipality takes a lot of stuff that would be permitted or planned or have resource allocation determined on the county or state level and makes it the purview of the municipality so SpaceX would gain the ability to manage things more unilaterally.
But it also seems odd to plan a big population center near to the launch site given the loud sonic booms it will be generating. And as you say, a city implies way more than just SpaceX employees, you also need all the services and infrastructure that people expect in life.
https://bsky.app/profile/bsky.esghound.com/post/3lc43jtf5422...
https://pubs.aip.org/asa/jel/article/4/11/113601/3320807/Sta...
tl;dr - it's very loud
Many cities arose around a major industrial operation, including the city I live in, Ostrava. Ostrava used to be a micro-town of around 1000 people from the 13th century (foundation) into the early 19th century, but with discovery of black coal, it swelled to its max size of 330 000 (reached around 1990), the entire urban area is close to a million people.
True, black coal mines and steel foundries cannot kill the entire city at once, but the pollution kills people slowly anyway.
But, Musk is on a b̶r̶i̶b̶e̶r̶y̶ campaign donation spree right now, so I'm sure he'll get this rammed through.
The clean water act issue involved a dispute between Texas and the EPA about which kind of Texas permit SpaceX needed for a potable (drinkable) water deluge at the pad. Texas regulators told SpaceX what they needed to do for permitting, SpaceX did it, and then the EPA came back and made them file different paperwork and pay a fine. My understanding is that the EPA did not require any changes to the deluge system, just different paperwork.
SpaceX concluded that paying the fine was faster than fighting the EPA.
SpaceX's version of events:
The debris from flight 1 you’re referring to did not reach any towns, and they have since added the above mentioned deluge system to prevent pad damage.
Working at SpaceX that may just be a hazard of the job, but if they want the location to be a real city with a post office and school and cafes and shopping and all that, it probably wouldn't work. But I'm not too familiar with how likely or how big adjacent city affecting disasters could be.