States Boost Small Business Diversity via Procurement & Aid

Small businesses are often lauded as the backbone of the American economy, driving innovation and creating local jobs. Yet, not all entrepreneurs have equal access to opportunities, particularly when it comes to securing lucrative government contracts. Recognizing this disparity, a growing number of states are enacting legislation aimed at leveling the playing field. Recent legislative activity across the country reveals a significant focus on enhancing opportunities and support systems for small businesses, with a particular emphasis on those owned by women, minorities, veterans, and individuals with disabilities. These initiatives signal a concerted effort to foster greater economic diversity and inclusion through targeted government action.

This wave of legislation, emerging across states from Hawaii to Rhode Island between January and March 2025, shares common objectives centered on economic equity and development. The primary goal is to increase the participation of historically underrepresented business groups in public procurement – the process by which governments purchase goods and services. By setting specific targets or goals for contracting with Minority-Owned Business Enterprises (MBEs), Women-Owned Business Enterprises (WBEs), and other disadvantaged business categories, lawmakers aim to direct a larger share of public spending towards these communities. Beyond procurement, these bills often seek to bolster the broader small business ecosystem through enhanced technical assistance, improved access to financing, and streamlined regulatory processes.

Several distinct stakeholder groups stand at the center of these policy changes. Naturally, small businesses in general are affected, but the most direct impacts are targeted towards specific subgroups:

• Minority-Owned Businesses: This includes businesses owned by individuals identifying as Black/African American, Latinx, Asian/Pacific Islander, and Indigenous/Native American. Legislation frequently aims to increase their share of government contracts, recognizing historical underrepresentation.
• Women-Owned Businesses: Similar to MBEs, specific goals and support programs are often designed to boost the participation of businesses owned and controlled by women.
• Disadvantaged Businesses/Businesses Owned by Individuals with Disabilities: Some bills explicitly include provisions or define categories to support businesses owned by people with disabilities or facing other socioeconomic disadvantages. For instance, Virginia House Bill 1802 (VA HB1802) specifically addresses employment services organizations, often linked to disability services, within its Department of Small Business and Supplier Diversity framework.
• Veteran-Owned Businesses: Particularly service-disabled veterans, are another group often included in supplier diversity initiatives, as seen in Virginia's definition of Small, Women-owned, and Minority-owned (SWaM) businesses.
• Government Agencies: State and local agencies are tasked with implementing these policies, adjusting their procurement practices, tracking progress towards goals, and administering new support programs. This requires significant operational adjustments and resources.

While the overarching goal of fostering small business diversity is shared, the legislative approaches vary significantly across states, reflecting different priorities and existing frameworks. Virginia, for example, has taken an ambitious stance with Virginia House Bill 1922 (VA HB1922), which establishes the Small SWaM Business Procurement Enhancement Program. This bill sets a high statewide goal of 42% utilization of certified small SWaM businesses in discretionary spending and mandates regular disparity studies to assess the need for remedial measures. Disparity studies are crucial legal tools, often required since the landmark City of Richmond v. J.A. Croson Co. Supreme Court case (1989), to justify race-conscious procurement programs by demonstrating specific evidence of past or present discrimination in the local market.

In contrast, Rhode Island focuses on incremental increases and structural support. Rhode Island House Bill 5683 (RI H5683) proposes increasing the minimum procurement award percentage for minority business enterprises from 15% to 20%, further specifying minimums within that percentage for minority-owned (10%) and women-owned (10%) businesses separately. Complementing this, Rhode Island Senate Bill 388 (RI S0388) seeks to expand the role of the small business ombudsman to also serve as a dedicated advocate within the state's commerce corporation, providing a direct support channel for businesses navigating state bureaucracy. Rhode Island House Bill 5684 (RI H5684) further mandates that the administration provide lists of certified MBEs and WBEs to prospective construction contractors, facilitating connections.

Illinois legislation highlights a focus on capacity building and operational support. Illinois House Bill 3655 (IL HB3655) proposes creating a state-funded financing program to provide low-interest loans specifically for small businesses that win state contracts, helping them manage the cash flow challenges often associated with fulfilling large orders. It also mandates the development of a scorecard system for assessing bids from smaller businesses (under $15M annual sales). Furthermore, Illinois House Bill 3540 (IL HB3540) aims to streamline the certification process for minority, women, and disabled-owned businesses by extending certification validity to a minimum of five years, reducing administrative burdens. Technical assistance is another theme, with Illinois Senate Bill 0058 (IL SB0058) and Illinois House Bill 3091 (IL HB3091) directing the Department of Commerce and Economic Opportunity to support regional manufacturing partnerships, connecting businesses with educational institutions and workforce stakeholders.

Other states are refining existing programs or definitions. Maryland Senate Bill 829 (MD SB829) and its companion Maryland House Bill 991 (MD HB991) focus on extending the state's Minority Business Enterprise Program, ensuring its continued application to various large-scale projects like public-private partnerships and offshore wind initiatives. Conversely, Maryland House Bill 826 (MD HB826) proposes changes to the Office of Small, Minority, and Women Business Affairs, including altering the definition of "minority person" potentially to include certain non-profits serving disabled persons, while also repealing an advisory committee. Hawaii is expanding eligibility for its Enterprise Zone program through Hawaii Senate Bill 125 (HI SB125), extending tax credits and exemptions for longer periods and broadening the definition of eligible activities to include sectors like advanced manufacturing, cybersecurity, and certain health care services. Hawaii Senate Bill 1343 (HI SB1343) addresses the functionality of the Small Business Regulatory Review Board by amending quorum requirements. New York Senate Bill 6374 (NY S06374) proposes changing the definition of a small business for MWBE purposes by increasing the employee threshold from 300 to 500, potentially expanding the pool of eligible firms. Even at the federal level, US Senate Bill 991 (US SB991) seeks to amend the Small Business Act regarding construction subcontracting requirements.

Despite the positive intentions, implementing these policies presents significant challenges. Ensuring agency compliance with procurement targets requires robust monitoring, transparent reporting, and accountability mechanisms. Securing adequate funding for new technical assistance programs, financing initiatives, or the administration of enhanced certification processes can be difficult amidst competing budget priorities. There's also the potential for resistance from established contractors who may perceive these programs as disadvantageous, potentially leading to legal challenges questioning the constitutionality of preference programs, particularly those based on race or gender. Such challenges often necessitate rigorous disparity studies, like the one mandated by Virginia's VA HB1922, to provide a strong evidentiary basis for the programs. Operational hurdles, such as coordinating efforts between multiple state agencies (e.g., procurement offices, economic development departments, transportation agencies) and ensuring that certification processes are fair and efficient, are also common. Furthermore, there's a risk that benefits may not be distributed equitably among different subgroups within the targeted categories, or that programs could lead to unintended consequences if not carefully designed and evaluated.

Looking ahead, the trend towards promoting economic inclusivity through targeted small business support appears poised to continue. The success of these varied state initiatives will hinge on effective implementation, ongoing evaluation, and the political will to sustain them. We may see future legislation expanding these programs, perhaps incorporating lessons learned from early adopters or introducing new mechanisms like mentorship programs, streamlined access to bonding, or incentives for prime contractors who exceed subcontracting goals. Economic conditions, shifts in the political landscape, and evolving societal priorities regarding equity and inclusion will undoubtedly shape the future trajectory of these policies. The potential for cross-state collaboration, sharing best practices identified through initiatives like Virginia's disparity studies or Rhode Island's ombudsman model, could accelerate the adoption and refinement of effective strategies in other jurisdictions seeking to build more diverse and resilient economies.