The city has its roots in the Black Hills mining rush of the late 1800s. Tin mining was dominant in the 1880s and led to an influx of capital and people into the area. As the mining industry subsequently waned, tourism and timber became increasingly important to the area. With the establishment of Mount Rushmore in the 1940s, Custer State Park, and the Sturgis Motorcycle Rally, the Black Hills became known as a tourist destination which Hill City benefited from. In recent years the city has diversified to become a center for the arts in the area featuring several art studios and festivals.
As of the census of 2000, there were 780 people, 298 households, and 213 families residing in the city. The population density was 1,013.5 people per square mile (391.1/km²). There were 340 housing units at an average density of 441.8/sq mi (170.5/km²). The racial makeup of the city was 89.74% White, 3.46% Native American, 0.26% Asian, 4.36% from other races, and 2.18% from two or more races. Hispanic or Latino of any race were 7.05% of the population.
There were 298 households out of which 39.3% had children under the age of 18 living with them, 52.3% were married couples living together, 13.1% had a female householder with no husband present, and 28.2% were non-families. 24.5% of all households were made up of individuals and 7.4% had someone living alone who was 65 years of age or older. The average household size was 2.62 and the average family size was 3.11.
In the city the population was spread out with 31.2% under the age of 18, 7.6% from 18 to 24, 30.3% from 25 to 44, 20.4% from 45 to 64, and 10.6% who were 65 years of age or older. The median age was 35 years. For every 100 females there were 94.0 males. For every 100 females age 18 and over, there were 85.8 males.
The median income for a household in the city was $32,500, and the median income for a family was $37,500. Males had a median income of $30,114 versus $17,000 for females. The per capita income for the city was $15,789. About 12.5% of families and 13.7% of the population were below the poverty line, including 17.5% of those under age 18 and 13.3% of those age 65 or over.