As Erik says, if you 'draw the line' at something, it means that the limit of what you consider acceptable does not extend to this point. He means that people should be free to have sex with whoever they want - either men or women - but that they should not 'cross the line' of acceptability by having sex with goats. By the way, there's one important thing to add to this explanation: Before the morality police start downvoting this post or having it deleted, we need to point out that the comment about goats is NOT SERIOUS. Elton John is not actually suggesting that people should consider intimate inter-species relationships.

"draw the line" set a limit on what one is willing to do or accept. People should be free with sex, so "draw the line at goats", means that you should not have sex with goats. He's saying it like this because because having sex with someone of your own sex should be acceptable. In the same way you can 'cross the line'. Imagine this line has been drawn, and someone has sex with a goat; he crossed the line.