Not all art that is beautiful will be completely true. Hugo's novels and the Romantic poets come to mind. Not all true art will be as beautiful as another piece of art. The use of the grotesque to point us towards the beautiful is a masterful tool of Walker Percy and especially Flannery O'Connor. Goodness, as it is 'that which is in accord with the nature of humanity," should underline anything that is beautiful and true, but not necessarily completely or in a straightforward fashion.
I think the artist who best exemplifies the Catholic approach to art is Beato Fra Angelico. The Order of Preachers does not see preaching as merely limited to the priest in the pulpit, which is why you have first-order friars, second order nuns praying for friars and sisters working in the schools and hospitals, Third Order Religious working in schools and hospitals, and TOSD living normal lives but witnessing through their actions, praying the breviary, and becoming infused with the Dominican spirit in the search for divine truth.
In fact, those not skilled in the art of oral preaching were encouraged to become skilled in painting and sculpture so that the churches might give a worthy reflection of God to the congregation. (Of course, the true vocation of a lay Dominican brother has slowly been eroded. A reaction to laicization of clergy and clericalization of laity perhaps?)
Others, such as the Decadents of the late 19th century focus on beauty, but deny that there should be any underlining ethics or morality within art. There is a high appeal to the senses and paradox. Largely, what separated Wilde and Company from the Catholic faith was the base pursuit of beauty for pride's sake and the pursuit of bodily and artistic pleasure. (It might be noted that so many Catholics came from this movement). Now of course, the closely-related Aesthetics movement and Decadence do not value social or political themes and their development like Marxists, to the point of revolting at the utilitarian aspects of their British peers like Arnold and the ever-increasing socialists with their political agendas (George Bernard Shaw comes to mind.)
Another problem with valuing art over the aims of art-and that is not an absolute dichotomy, but we need to be aware of the tension- is that in democratic society founded on natural and unalienable rights we seek an ambiguous freedom. However, there is a tension between my rights and the rights of others. There is also a tension between rights and the common good (natural law, which is what society in a unified Christendom would be founded on), as well as between prudence of governance and the natural law.
Free speech is not without limits. Security and safety reasons mean that we refrain from talking about bombs at airports, and we keep from shouting 'Fire!' in a crowded theater. A consensus of community standards means that indecent or obscene material can be banned (I agree in principle, but whatever does this mean?? The Supreme Court really doesn't seem terribly fond of taking practical measures to exclude pornography completely from a legal jurisdiction.). These days, any symbol of Christianity can be taken off of public grounds, or a lottery system (like in a town in Southern California) leads to only Jewish and atheist displays at a park which for decades had a Nativity scene.
The state cannot be a theocracy, but it cannot let attacks on Catholicism go full force. That would not only be an assault upon God and His Holy Church, but lead to revolution. At a more normal level, the state cannot reasonably expect to protect everyone from every offense, but some are particularly graphic and egregious in nature or committed over an extended period, or both. "Piss Christ" is a perfect example. The Last Temptation of Christ is another example, and since it was a film, the government wouldn't censor it; the National Legion of Decency would have condemned it.
This brings me to an event that recently happened in Pittsburgh. Apparently, a student walked around at the annual art school parade at Carnegie Mellon University walking around dressed as the Pope from the waist up, and naked from the waist down. She evidently shaved a cross into her pubic hairs. Poor Bishop Zubik and his staff had to view the photographs that someone mailed (I hope so he could speak out, and not in an act of defiance or pride). The university's response is pathetic. That isn't art. It's the Last Acceptable Prejudice.