We played that too, but no one (that I know anyway) thought "queer" meant 'homosexual', it basically meant 'different' (i.e. having the ball). Great game - it was definitely a gut check having to pick up that ball, and it really separated the men from the boys in terms of who grabbed the ball and who didn't. Personally, I'd suggest that StQ is a self-esteem building game; once you've had the guts to grab the ball, ran, and survived your pounding you were a much better, more confident person (if you weren't in the nurse's office).
My thoughts exactly, but since dodgeball is taboo now, smear the queer would definitely float like a lead balloon.