The origins of the community's name date back to the 1890s. Area residents requested a post office and gathered to choose a name. During the meeting, a thunderstorm occurred, followed by a rainbow. The residents, struck with the rainbow's beauty, named their town after it.
In the 1920s, Rainbow had a population of approximately 113. The population began to decrease after that period, reaching a low of 40 in 1960. With the opening of nearby Dinosaur Valley State Park in the 1970s, the population increased. Current estimates of Rainbow's population range from 76 to 121.
