The story goes that Sega was actually working on a game that would see the player touring across the United States, OutRun-style, but the news that a similar game was in development at a rival firm caused the company to change direction.
Kenji Sasaki, who joined Sega from Namco after working on Ridge Racer, explains what happened on social media:
Originally, the forest stage was based on Redwood National Park and was almost finished, but during the development process, a game released by another company had a stage with almost the same image, so we suddenly recreated it with the image of Yosemite.
Originally it was a racing game in the style of the movie "The Cannonball Run", set in the USA. As you say, the taste changed during the development process because Cruisin' USA appeared.
We needed a different image from the Daytona USA or the Ridge Racer, so even before we changed the image to a rally-like one, the most important part of the project was to drive the car at high speed while drifting on dirt roads and narrow streets.
Developed by Eugene Jarvis' company TV Games Inc., Cruis'n USA was manufactured by Midway Games. While it was promoted as using the N64 hardware, it actually ran on Midway's V-Unit arcade hardware. However, it was later ported to the N64 and would spawn several sequels, including the recent Cruis'n Blast.
If you'd like to learn more about Sega Rally's development, then this video is worth a watch.