The origin of the term Hoosier as a demonym for people from Indiana is lost to the mists of history and probably will never be settled with any kind of authority. But, I just came across a theory that seems plausible. (And they aren’t all plausible — I remember an elementary school history book including the idea that it’s a play on “whose ear?” because early Hoosiers would wrestle a lot and possibly bite each other.) There are others that are plausible – such as one that it’s derived from an old Anglo-Saxon word that refers to a promontory or cliff; presumably based originally on an idea that people from those places were unsophisticated at whatever time the term gained traction.
In any event, the notion advanced by William Piersen suggests that maybe the term has a connection to a freed black man referred to as “Black Henry” Hosier who was an unusually gifted orator and evangelist. Piersen didn’t find the existing theories particularly satisfying. In support of the “Black Henry” idea, he notes that Henry’s last name was variously spelled by contemporaries as Hoosier, Hosier, Hossier, Hersure, Hosure, Hosure, and Hoshur, all of which sound a lot like “Hoosier.” Henry accompanied Methodist preachers and was nominally assisting them, but the reality seems to have been that he was the main draw. Of Henry, early American luminary, Benjamin Rush said, “making allowances for his illiteracy, he was the greatest orator in
America.” Frontier Methodists were apparently less than scrupulous about racial separation and so it’s plausible that more refined elements of white society, Baptists and such, might have used the term as a slur for the less refined backwoods Methodists of the sort who might listen to the preaching of an illiterate black man. Piersen finds support for this idea in the 1833 poem “the Hoosiers Nest” that uses the word “Hoosheroons.” Piersen speculates that this might be a play on terms like “quadroon” and “octoroon” which were used to label the amount of “black” blood a person had.
As a matter of memetics, I can definitely see where a term combining social class, religion, race, and a famous personality as a put down might gain currency and then, subsequently, be embraced by the targets as a badge of honor. It’s a thin reed, but plausible.
If you want to read more broadly on the subject, Jeffrey Graf provides a good overview on the competing theories.