Carol and Radish, I am in complete agreement. And for those who are saying if you don't like the idea, don't go... well, how likely are any of us to go to a story hour for kids who are 3? Or 6? This is not about what WE go to.
I don't think dressing in drag is just another funny costume. If someone wanted to dress like a silly clown (as long as it wasn't the scary type of clown that so many kids seem to be afraid of), I'd have no problem with that. "Oh, her? She's just the silly story clown." But I really think the persona and the atmosphere conveyed by a drag queen is something else entirely. And while it might be amusing for some over the age of 18 or so, even for some titillating, it is sick and totally inappropriate for small children. In fact, it sounds like some sort of insane skit made up by the SNL bunch, or something contrived for a drunk fraternity party. It is not harmless, it's an indication of how corrupt this society has become.
If you really think it is OK, ask yourself: how would you feel about a toddler story hour conducted by someone dressed as a prostitute? A Nazi? A political figure you think is totally evil? How about Charles Manson? Or how about a really terrifying ogre?
I have to wonder about the real motive of those who came up with this idea, and those who are encouraging it.