Former toon Private Eye Eddie Valiant (Bob Hoskins) is called to the Maroon Cartoon Studios lot at the request of its owner, R.K. Maroon (Alan Tilvern). Maroon is upset that one of the studio's biggest stars, Roger Rabbit, has already put the latest Baby Herman cartoon over-budget by $25,000. Maroon chalks Roger's acting mistakes up to him being worried about his wife, Jessica. Recent newspaper articles have circulated rumors that Jessica is seeing someone else. Maroon assigns Valiant to get pictures to confirm this rumor. When Valiant claims he doesn't work in Toontown, Maroon tells him that Jessica performs at a club in Los Angeles called 'The Ink and Paint Club.' Valiant accepts the assignment for $100, of which Maroon pays $50 upfront, and the other half promised upon completion of the assignment.
Later that evening, Valiant goes to the Ink and Paint Club, where he encounters Toontown's owner and 'gag king, Marvin Acme (Stubby Kaye) in the audience. Acme playfully squirts ink on Valiant's shirt, which infuriates the Private Eye, until it is revealed that the ink is 'disappearing ink.' Shortly afterwards, the show starts, and Valiant is shocked to find that Jessica is not really a rabbit, but a shapely toon woman. After the show, Valiant sneaks out the back to a window, and sees Jessica in her dressing room, with Marvin Acme, playing pattycake.
Valiant takes pictures, and shows them to Roger and Maroon in the Studio Head's main office. Infuriated by the photos, Roger claims that he and his wife will be happy again, and bolts from the office.
The next day, Valiant is awoken by Lieutenant Santino (Richard LeParmentier), who has come to inform him that Marvin Acme was killed the night before. Currently, Roger is the prime suspect, given what he said to Maroon and Valiant. At the Acme Gag Factory, Valiant is introduced to Judge Doom (Christopher Lloyd), and his gang of Weasels that run his 'Toon Patrol' gang. Having jurisdiction over Toontown, the judge explains to Valiant that in order to 'rein in the insanity,' he has resorted to a new method on which toons can be killed: The Dip, a mixture of turpentine, acetone, and benzine. The Judge demonstrates the Dip to Valiant at the Gag Factory, when he dips and obliterates a squeaking toon shoe.
Valiant returns to his office, only to find Baby Herman waiting for him. Herman pleads with the detective that Roger is innocent, and that Acme was most likely 'bumped off' because he owned Toontown. Acme had once made a solemn oath that he would leave Toontown in the ownership of the toons if anything happened to him, according to Herman. However, while there is talk that Acme had a will that stipulated this, noone has ever seen it.
Valiant goes into his office, and after glancing at one of the pictures of Jessica and Acme, notices that in Acme's coat pocket, is a piece of paper that says 'last will and testament.' Settling down for a small nap, Valiant finds Roger is hiding in his bed. Roger it seems, was able to find Valiant's office, but not after asking a number of people for help. However, it is most likely that since he's a wanted rabbit, someone has most likely told the Toon Patrol about his whereabouts. Valiant tries to get rid of Roger, but the rabbit pleads with the detective to take his case and help clear his name.
Roger explains that after he got upset about the pictures, he went to the Ink and Paint Club to see Jessica. Not finding her in her dressing room, he wrote her a love letter on a piece of paper that was lying around. He waited for her to appear, but when the weasels showed up looking for him, he took the love letter and ran away. Valiant wonders just why Roger would come to him, seeing as how he took the pictures of Roger's wife. Roger explains because of Valiant's past career of helping toons.
At one point, Roger gets a bit carried away, and accidentally handcuffs himself to Valiant. It doesn't help that Valiant has no keys to the cuffs, and the weasels have shown up looking for Roger. Valiant pretends to be washing his laundry in the sink when they arrive, and after the weasels leave, Roger emerges from the sink. Valiant then goes across the street to the Red Car Trolley Station, where his girlfriend Dolores (Johanna Cassidy) is working at a restaurant. She allows them both into a hidden room at the rear of the restaurant, where Valiant gets the handcuffs off, and tells them that he believes that Acme's death was set-up by R.K. Maroon, and that Maroon wants to get control of Toontown. Valiant has Roger stay in the hidden room, while he goes back to his office. Meanwhile, Valiant sends Dolores downtown to check the probate of Acme's will.
After taking a shower, he emerges to find Jessica has come into the office, asking for help finding Roger. Valiant claims that she most likely needs Roger to 'make the scheme work,' but Jessica claims that she does love her husband, and that her 'figure' often leads to speculation of her being 'bad.' Jessica further goes onto explain that the pictures that Valiant took were set-up. Maroon had wanted to blackmail Acme, and promised Jessica that if she didn't go along with his scheme, Roger would never work in pictures again. Caring for her husband, she allowed herself to go along with the scheme.
Shortly afterwards, Dolores shows up, and explains that Valiant's theory is incorrect. Maroon appears to have no intentions of obtaining Toontown. According to the probate, a company called Cloverleaf Industries put in a bid for the rights to Toontown, and at midnight, they will have ownership unless Acme's will turns up. It also happens that Cloverleaf Industries also recently claimed ownership of the Red Car Trolley Line. Valiant and Dolores return to the restaurant, only to find Roger dancing about to the amusement of the guests. Valiant throws Roger and himself into the hidden room, just before Judge Doom and his weasels appear. Everyone in the room denies that Roger was there, but Doom gets him to appear by tapping and singing 'Shave and a haircut.' According to Doom, no toon can resist this song, without finishing it with 'two bits.' As expected, Roger appears, and is then accosted by Doom. Valiant saves the rabbit by offering him a drink. Roger's inability to hold his alcohol, turns his head into a giant steam whistle. Valiant knocks out the weasels, and rushes out of the bar with Roger leading the way.
Tryring to use the weasel's Toon Patrol wagon, they encounter a cartoon cab named Benny in the rear of the car. Valiant and Roger then use Benny to escape from the weasels. Benny deposits them at a theater, where Roger is enjoying the 'Goofy' cartoon playing on the screen, but Valiant is still upset. Roger, who has grown perplexed at Eddie's attitude, asks what happened to turn him into such a 'sourpuss.'
Valiant then explains that his partner and brother, Teddy, was killed by a toon. Many years ago, while investigating a robbery at the First National Bank of Toontown, Eddie and Teddy were chasing a guy who dropped a piano on them from 13 stories up. The piano broke Eddie's arm, but killed Teddy. Valiant never did find out who the toon was, except that he had 'burning red eyes' and a 'high squeaky voice.' Roger feels terrible about this, and sobs that Eddie is justified in his hatred of him and toons. Eddie claims he doesn't hate Roger, and the toon rabbit is overjoyed.
On their way out of the theater, a newsreel plays footage of Cloverleaf Industries executives making a deal with R.K. Maroon, and Valiant thinks he's finally found the 'connection!' Valiant places a call to R.K. Maroon, telling him he has the will, as a way to get in to see the Studio Owner. Arriving at the studios, Roger is told to stay by the car.
Valiant meets with Maroon, who seems very nervous about the whole thing. Valiant uses Roger's love-letter as a ploy to throw Maroon off-guard, and then knocks the Studio Owner to the floor, wanting answers. When Maroon denies any wrongdoing, Valiant runs his tie through a movie-o-la, almost strangling him. Maroon explains that he had a chance to sell his studio, but Cloverleaf also wanted Acme's property as well. When Marvin refused, Maroon planned to blackmail him with pictures of him (Acme) and Jessica. Maroon then goes on to try and explain more, when suddenly gunfire erupts, and Maroon is wounded. Valiant goes to the window where the shots came from, only to see Jessica running away.
Valiant returns to his car, only to find Roger gone. Giving chase, he follows Jessica's car but stops when it drives into the tunnel leading to Toontown. Valiant arms himself with a toon gun (complete with toon bullets), and heads into Toontown. After a series of madcap hijinks through the toon city, Valiant finds himself in an alley, with Jessica pulling a gun on him. However, the bullet she fires streaks right past him. When she approaches, she points to a gun on the ground behind him. Apparently, Doom was planning to shoot Valiant, and her bullet saved his life. This is the same gun that was used to kill R.K. Maroon. Far off in the distance, the two see Doom running away, claiming that they're 'all dead.'
Jessica and Valiant try to get Valiant's car to give chase, but it appears to be gone. As well, roger has disappeared from Jessica's trunk (apparently, she had knocked him out and put him in the trunk to keep him from getting hurt). Both Jessica and Valiant manage to thumb a ride from Benny, who helps them escape from Toontown. In the car, Jessica tells Valiant that Acme knew Doom was after Toontown, and gave her the will for safekeeping. However, the envelope containing the will only held a blank sheet of paper.
On the other side of the tunnel, Doom is waiting with a barrel of Dip, that ends up flattening Benny's tires, causing him to crash. Doom then has Valiant and Jessica taken to the Acme Factory. The two are frisked for the will, but nothing is found. It is then that Doom explains his master plan. Planning to end his career as a Toontown judge, he is now going to take advantage of his stake in Cloverleaf Industries (of which he is the sole stockholder). Pulling aside a giant cloth, he shocks Jessica and Valiant with a giant Dipmobile, containing enough dip to wipe out Toontown in a matter of minutes. Doom's master plan is to build a freeway in its place: a concept that will allow high-speed driving, and end traffic jams. Valiant balks at this, saying that people can still take the Red Car Trolley Line for a nickel. It is then that Doom reveals that his purchasing of the Trolley Line was part of his plan, as he plans to dismantle the transportation system, making people have no alternative but to use his freeway system.
Just then, Roger bursts through a sewer pipe, but is quickly subdued. Doom has both Roger and Jessica hung at the far end of the room, planning to 'dip' them. As he confidently walks away, he trips on some spilled gag eyeballs and falls to the ground. Angered at the weasel's laughing, he angrily shouts, 'One of these days, you idiots are gonna laugh yourselves to death!' As he disappears around a corner, Valiant manages to distract the weasels, by tumbling, falling, and using some Acme gags nearby. His lunacy causes the weasels to do just as the judge promised, and they all die laughing. However, one of the weasels, Psycho, had turned on the dipmobile's cannon, which is heading right for Roger and Jessica. Valiant manages to abort the cannon's direction, but not before being knocked about by Judge Doom. During the scuffle, Doom ends up getting his hand and foot coated in a super-strong glue, and soon ends up under the front of an Acme steamroller. Screaming at his predicament, he is severely flattened. However, he suddenly rises off the floor, hopping about. Valiant makes the correct assumption that the Judge was actually a toon. Re-inflating himself, Doom reveals who he really is: the toon that many years ago killed Teddy Valiant. Doom then starts the dipmobile back up, and then proceeds to kill Eddie with a giant toon buzzsaw. However, Eddie opens a rear valve on the dipmobile, sending a wall of dip on Doom, causing him to melt into a puddle of paint.
With the dip spent, Roger and Jessica are saved, as the dipmobile then crashes through the wall, creating an opening into Toontown, where the dipmobile is hit by a fast-moving train.
After Eddie manages to clear the Gag Factory's floor of dip, Roger and Jessica are lowered to the ground, just in time for Benny to return with the police, Dolores, and Lt. Santino. Eddie explains that it was actually Doom who killed Marvin Acme, as well as R.K. Maroon, and his brother Teddy. All the toons of Toontown arrive to see the carnage and comment about the death of their would-be murderer. As Baby Dolores complains their town is still in danger of being demolished by another developer, Delores notices a stain on Eddie's shirt, it appears that the ink that Acme squirted him with, according to Roger, was 'disappearing and reappearing' ink. Getting an idea, Eddie returns the love letter to Roger, who begins to read it. As Roger reads the letter, a number of words begin to appear, and Eddie's hunch is correct: The blank piece of paper that Roger found in Jessica's dressing room, was Acme's will, written in invisible ink, and as promised, the will gives ownership of Toontown to the toons!
Having noted Valiant's funny dance for the weasels, Roger asks Eddie if he has gotten over being a sourpuss. When Eddie mentions that 'only time will tell,' Roger offers to shake his hand...but failing to mention a hand-buzzer that shocks Eddie! Eddie pulls his hand away, with an angry look. "Don't tell me you've lost your sense of humor already," says a fearful Roger. Eddie then grabs him by the neck and asks, "Does this answer your question?" Eddie's 'answer' is a cartoony kiss to Roger's lips...proof that Eddie has gotten his sense of humor back!
Eddie, Dolores, Roger and Jessica then walk off towards Toontown, as a number of cartoon characters sing the song, 'Smile, darn ya, smile!' Meanwhile, Porky Pig is among the Toon cops clearing the scene and realizes he has found a good line to end the story, "That's All, Folks!" as he address the audience just before Tinkerbell flies in to tap the scene in her own tradition to bring this unique film collaboration to a close.