City Journal: Set-Asides Are Unconstitutional

Covid-19 has devastated small businesses nationwide, and New York’s entrepreneurs and landlords have been particularly hard hit. In response, Governor Andrew Cuomo has awarded millions of dollars to affected small businesses through the New York Forward Loan Fund. But to get these taxpayer-funded loans, it helps to be a minority-owned business, as designated by the state, because Cuomo’s office has announced that it will be “focusing on” Covid relief for minority- and women-owned firms. Relief was welcome news for those receiving grants, but small-business owners unable to obtain aid may feel like they have been shunned because of their race. It’s only the latest example of how New York politicians, in their fight against racial discrimination, have established a new system of racial prioritization.

They may find that their efforts run afoul of the Constitution.

It’s not just the emergency-loan program. Racial discrimination is now a primary consideration for bureaucrats engaging businesses to build state roads, highways, and bridges. Cuomo has signed into law a statewide mandate designating infrastructure-related set-asides for preferred minority groups. Though the law doesn’t expressly state the percentage of public dollars reserved for these groups, the governor has previously said that he would reserve 30 percent of public-contracting dollars for businesses owned by women and black, Hispanic, Asian, or Native American residents.

Cuomo’s set-aside law is bad news for businesses that contract with the state of New York. To comply with the state’s onerous requirements, contractors working on state-funded projects must themselves take the race of subcontractors into account. Those failing to do so must persuade the state to grant them waivers, which, if denied, could put them on the hook for monetary damages.

In 2017, the governor’s office boasted in a press release that the $2.2 billion set aside for minority and women-owned enterprises represented both the largest percentage and the largest dollar figure allocation for such businesses in the nation. Cuomo also created an advisory council to “ensure that the State is able to meet and eventually exceed” the 30 percent set-aside requirement.

Racial set-asides run counter to the American principle that opportunities should be distributed based on merit, not on race. Laws like New York’s make everything about race. Those seeking to take advantage of the New York law must undergo an onerous process to get the government to certify their minority status. This process varies state-by-state, but some states require businesses to submit three declarations from “recognized minority or ethnic community organizations” confirming that the applicant is a member of their community.

Even with these verification requirements, fraud is rampant in set-aside programs for minority-owned businesses. One investigation in Washington State identified a substantial number of businesses designated as “minority-owned”—hauling in millions of dollars from state government contracts—that should never have qualified for minority status. The investigation also found contractors “blatantly gaming the system by obtaining contracts because of their minority status, only to have larger companies perform the actual work.”

Racial set-asides are also unconstitutional. The Supreme Court’s landmark decision in City of Richmond v. J.A. Croson Company established that government mandates for contractors to subcontract 30 percent of each job to minority business enterprises violates the Constitution’s promise of equality before the law. In an opinion written by Justice Sandra Day O’Connor, the Court recognized that racial set-asides also have the unintended consequence of stamping minorities with a badge of inferiority. In other words, laws that reserve contractor dollars based on race imply that minority subcontractors cannot compete without the government’s help.

Government at all levels should strive to ensure equality before the law, and New York is free to use its enforcement powers to prohibit contractors from discriminating because of race. But Cuomo’s approach of awarding public projects to entrepreneurs precisely on the basis of race is both socially divisive and constitutionally dubious.

This op-ed was originally published by City Journal on December 2, 2020.