This is another great question. An EPA watershed study in Seattle in 2006 discovered that dog waste was a significant contaminant found in source water. This suggests that dog waste left to accumulate in lawns is responsible for polluting our waterways.
As it turns out, water treatment plants are designed for purifying waste water from humans. They are not effective at removing parasites and other contaminants from dog waste. Therefore, dog waste can actually pollute our drinking water. Yuck!
Also, just like agricultural animal waste, dog waste contains phosphorus and nitrogen that can pollute source water. In some cases, nitrogen from dog waste is responsible for killing fish.
While dog waste comprises about 4% of landfill space, bagging the waste and placing it in the trash is currently accepted as the best way to safely dispose of dog waste by the EPA.
An alternative to sending the waste to a landfill is composting. Because of controversy around composting dog waste, namely that the compost may not reach a temperature that kills parasites, composted dog waste is not recommended for use in gardens. It would be safe to use in landscaping.