Why are people racist?

1. People are animals.  
2. Animals have behavioral tendencies.
3. Some of these tendencies, in certain situations, help keep the animal alive and more likely to pass on the innate behavioral wiring.
4. Wariness of strangers is one of these tendencies.

One example is to avoid touching feces. Another example is to be wary of strangers.
Why be wary of strangers?
Because they are not bound or restrained by the rules and social pressures of your community.  
Tourists are notoriously disrespectful.  As are armies on the march.
People who look different from you are typically not from your community.

On the bright side, if there is someone who looks or behaves differently but is long-known within a community, then most people (even small town conservatives) tend to accept them as a person.

So, my short answer to why people are racist is because they have not gotten to know very many of "those strange looking people."  Strange and unfamiliar is High-Risk, Low-Benefit. 

I bring this up because I have the good fortune of working with a couple of racist hicks.