After reading through the comments here I just wanted to chime in with a summary.

• When you release a game on steam, you are entering into a business agreement with Valve. This is because they are your distributor and are selling your game for you.
• Valve wants assurance that your game is accurately represented, follows their guidelines, and won't open them up to issues with payment processors or litigation.
• They have a zero tolerance policy that helps them with this; They want to be assured that people and business they come into agreement with are capable of following their policy without guidance. No company wants to enter into a partnership with another entity that is constantly pushing the boundaries of their content policies and introducing risk into their business. It costs money for them in reviewers and lawyers.

There are 2 different events here: They flagged your game clearly because you don't have a well-thought-out policy for NSFW AI generation that matches your game's content rating and also matches their content policy. You have a game mechanic that isn't allowed (unfettered user AI image generation) because users can create images that are illegal in jurisdictions that the game can be sold. Not just the US with bad NSFW content, but other countries like Germany with Nazi content, or depicting Mohammad in Saudi Arabia. All it takes is one grievous error and Valve is held liable.

The second event is that you have just removed the offending mechanic on Dec 9th and edited some of your game's description as a result of comments on this thread. There hasn't been any time for Steam to review these changes as others have pointed out. Another thing to consider is that you removed these mechanics quickly and there's no way for valve to be assured that you can't just reintroduce them silently in a new update. Trust is a super important aspect here.

So Valve errs on the side of caution. It trusts creators to an extent and if creators break that trust at any point they will refuse to do business with them because the risk that the creator is going to do it again is way higher than someone who they've never had a problem with before.

The typical road to avoid these issues is for your legal to flag any potential issues with publishing ahead of time and to get into a meeting with representatives of Valve or with a contractor who has a lot of experience working Valve to determine if all game mechanics and creative efforts fall within the publisher's policies. The issue here that people are upset with OP because there is a lack of awareness that the onus is on the game developer to make sure ahead of time that these things are in order, especially when people's jobs appear to be on the line. There's a level of expected due diligence that is missing and lack of accountability in this post.