Ahh the Fag of IT!! As a 30-something gay man, I hate the word. However, I think the change from "fag" to "gay" was a cultural one.
According to Gordon (2000) "Stephen Sondheim: A Case book", she wrote "Interestingly, the only lyric change for the 1995 production was to change a reference in 'You Cold Drive a Person Crazy' from 'fag' to 'gay.' This change would not have been necessary for mere updating, and was presumably made to show greater sensitivity to the diversity of theater audiences and society in general."
While I think this response is interesting, I definitely think it reads of heterosexism. As if somehow, during the revival Sondheim suddenly realized that gay people go to the theater.
I think the answer is probably much simpler. I think "fag" was more culturally appropriate when it was written. For the revival, Sondheim realized that the word was no longer appropriate, so he changed it of his own free will.
TD
Show's I've Seen: 2011: American Idiot, Lombardi, Screwtape Letters, Adams Family, Imaginocean, Phantom - 2010: Spiderman, A Little Night Music, Bloody, Bloody Andrew Jackson, La Cage aux Faux, Next to Normal (twice), Fanny (City Center), Next Fall, - 2009: Finian's Rainbow, Let Me Down Easy, Toxic Avenger, Hair, Mary Stuart, 9 to 5, Avenue Q (a few times), Young Frankenstein, Cry Baby, Applause (City Center), Xanadu, Legally Blond, Glorious Ones, Gutenberg: The Musical, Spring Awakening, Company, Dessa Rose, Jersey Boys, The Color Purple, Taboo, Altar Boys, Lestat, The Weddings Singer, Hairspray, Spamalot, Dirty Rotten Scoundrels, Wicked, Brooklyn, Urinetown, 25th Annual Putnam County Spelling Bee, Grey Gardens, Drowsy Chaperon, Thoroughly Modern Millie, Les Miserable, Aida, Great American Trailer Park Musical, Into The Woods, Naked Boys Singing, Cabaret, Last Five Years, Jekyll & Hyde, Corpus Christi, Side Show, Rent (a few times), Footloose, and Ragtime (First Broadway Show I saw).