Decades ago it (in my experience) originated from the use of usually gaudy non-performance enhancements to Japanese or other foreign cars (mostly originally Hondas IIRC) to make them look fast or faster without actually doing anything to make them fast. (gigantic rear spoilers, loud exhaust, neon underlights, etc)
In a pretty short time it bled into doing the same to any slow car (I think it was mostly Hondas to start because so many people were doing it to Honda Civics at the time), then I think (again this is just in my own usage at the time) into usually gaudy non-performance enhancements to ANY car.
There's probably also some connection to "rice burners" which I think predates the word, which I first heard applied to motorcycles, again Japanese brands like Honda, Yamaha, Suzuki, and then later sometimes to cars from similar brands.
The racism in "ricing" comes from the idea that since the original targets of the term tended to be Japanese or other asian cars (Kia, hyundai) and with the perception that rice is closely associated with those cultures -- "ricing out" your car essentially meant "covering it with gaudy fripperies like those Japanese cars."
I understand why some folks think it's racist, and I understand why some folks don't, but I don't use the term anymore because I decided it wasn't that hard to use another word, and just because I don't think it's hurtful that doesn't mean it isn't to someone.