Chef's passionate protest declaring the South Park flag racist inflames the entire town. The kids separate into two opposing camps and prepare to debate the issue. Stan and Kyle champion the current flag while Wendy and Cartman head up the side for a new flag. Wendy Testaburger finds herself strangely attracted to Cartman.
Jimbo and Chef are in the Mayor’s office, arguing over the South Park Flag. Jimbo said that the flag design had been around since the time of when the town was first founded, and should remain the way it is. Chef protest that it is racist and needs to be changed. When the mayor unfurls the flag, asking him what is wrong with it, we can see why he’s angry: it shows four white figures hanging a black figure in the gallows and cheering.
The third grade class is given an assignment to work on the “Change the Flag” debate, and are given time for research. Stan, Kyle, and Kenny talk with Jimbo over the matter, while Wendy, Bebe, Clyde and Butters join Chef in gathering support from the locals, most of whom don't have a strong opinion either way (everyone says that they can see why the flag is racist, but they point out that it is part of the town's history). Stan and Kyle are in charge of the group who want the flag to stay the same; Wendy and Cartman lead the group of supporting the changing of the flag.
At lunch time, Stan and Kyle ask Chef for help. It turns out Chef's converted to Islam and changed his name to “Abdul Mohammed Jabar Rauf Kareem Ali.”. When they say that they are working to keep the flag the same way, he gets terribly angry, though they don't understand why. Wendy leads her team in the library when Cartman suddenly interrupts the process with his own strategy. He gets the team to go dig info on Stan and Kyle, and thereby win the debate using Ad hominem attacks on their opponents' credibility.
Back at the city hall, a branch of the Klu Klux Klan join the side supporting keeping the flag the same way, saying that the design is a symbol of “white power.” Jimbo, Ned, and the other flag supporters don't want to be on the same side as the KKK, and become uneasy about these new supporters. Jimbo and Ned then go to a night time meeting of the Klan members, disguised as members themselves, and tells the leader that they ought to switch sides, and fight to have the flag changed. They then explain that the people already on that side will probably work to keep the flag the way it is, knowing that the KKK are in favor of changing it. This idea is accepted, but while Jimbo and Ned are leaving, Chef happens to notice them dressed as KKK members, and leaves without explanation. Jimbo starts to think that history may not be worth saving sometimes.
The mayor then shows Chef how the flag has changed--now the black man being hanged is smiling serenely--but Chef is angry and leaves again. The mayor then decides she doesn't want further part in this debate, and leaves it up to the kids. While Wendy and Cartman are working together, they develop a strong attraction. Things become worse for Wendy after she dreams of him that night, and she seeks advice from Bebe, who explains the concept of sexual tension to her. Bebe says that sometimes you just have to act on impulse, and that the best way for Wendy to get it out of her system is to kiss Cartman.
While Wendy is trying to give her speech on the issue, she keeps getting distracted by her crush on Cartman. In frustration, she kisses Cartman--and Stan looks shocked and appalled for the rest of the episode--and then continues with her speech. It is later found out that Stan and Kyle’s side thought that the debate was on capital punishment, they were in fact so not racist that they never even made the distinction between the black man being hanged and the white executioners. Everyone is touched by this. In the end, everyone reaches a compromise.
Ethnic diversity is added to the flag: people of all races are hanging the black man, including another black man that's among the mob, and all are happy and holding hands. Also, Chef delivers the moral of this story: that his inclination to anti-racism almost made him a racist and perceiving things according to race leads only to further racism. In the final scene, Wendy tells Cartman she’s lost all her feelings for him, and runs off to be with Stan, leaving Cartman alone and dejected (implying that he may started to develop genuine feelings for Wendy).