Congress made CSA soldiers American veterans around 1901 if I recall, so it makes no sense to drop CSA cemeteries from the VA system if they are in it.
Congress recognized Confederates as “civil war veterans,” not American veterans. The purpose was to allocate funds for headstones for Confederate graves, and for widow’s pensions.
Nevertheless, Confederates were “American veterans,” not because of any act of Congress but for the same reason Union soldiers were — “America” was part of their country’s name.
Most veteran legislation doesn’t refer to “American veterans” at all, even when referencing U.S. vets; it refers to the war in which they fought — Mexican war veteran, civil war veteran, Spanish-American war veteran....
The fact that Confederates were recognized as “civil war veterans” means this legislation prohibiting their flag — which has apparently been displayed in these cemeteries for generations — is simply to insult and to stir up conflict and negative emotions.