Yes, miners may freely select which transactions to include in their block. They may choose not to include some transactions, or could even build an invalid block that will get rejected by the network.

However, if the censored transaction pays a sufficient fee, another miner will pick it into a subsequent block instead. It would take a majority of the hashrate acting in concert to reliably enforce censorship across the network as they would need to reorganize out any blocks by miners not participating in the censorship. In defense, censored spenders could raise their transaction fees to make it more attractive to defect from the censors. Assuming that any parties that might be subject to such censorship already avoid address reuse, such an attack would be generally fairly ineffective.