This is a rush transcript from "The Journal Editorial Report," October 2, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," the GOP's Rust-Belt resurgence. Once down-and-out Republicans are charging back in states like Ohio, Pennsylvania, Michigan and Wisconsin.

And as the fight over tax cuts drags on in Washington, voters in many parts of the country are already feeling the pinch, thanks to historic tax hikes by cash-strapped states. We'll tell you which are the worst offenders.

Plus, the White House exodus. Rahm Emanuel is just the latest Obama aide to jump ship. What it means for the president's post-election agenda.

Welcome to the "Journal Editorial Report." I'm Paul Gigot.

Call it the Rust-Belt resurgence. After a decade of declining political fortunes, the Republican Party is poised to make big gains this November in a swath of upper-Midwest manufacturing states the Democrats have owned for years. Polls show Republicans have a good shot at taking back governor seats in Pennsylvania, Ohio, Illinois, Wisconsin and Michigan. And some key Senate races are leaning toward the GOP as well, including the seat of incumbent Democrat Russ Feingold in Wisconsin, as well as President Obama's old seat in Illinois.

Fox News contributor, Michael Barone, is senior political analyst for the Washington Examiner and co-author of "The Almanac of American Politics." He joins me now from Washington.

Michael, welcome back to the program.

MICHAEL BARONE, AUTHOR, FOX NEWS CONTRIBUTOR & SENIOR POLITICAL ANALYST, WASHINGTON EXAMINER: It's very good to be with you, Paul.

GIGOT: A lot of people are comparing this election to 1994, where the Republicans picked up a lot of seats. There's one difference I know, which is the Republicans picked up a lot of gains in the South. This year, a lot of the gains they expect to get, if they're going to take back the House and Senate, are across the upper Midwest. What's going on in that part of the country?

BARONE: Well, I think something very important is going on, that the political commentariat generally hasn't figured out. When I was growing up in Michigan, when you were growing up in Wisconsin, Paul, the political rule was, in times of economic distress, the industrial heartland — the states you named, Pennsylvania, Ohio Michigan, Wisconsin, Illinois — in times of economic distress, they moved toward the Democrats. What they're seeing now is that, in a time of economic distress, they're moving heavily towards the Republicans in a way we haven't seen since '94. I don't mean 1994, I mean 1894.

(LAUGHTER)

GIGOT: Really, that significant? What explains the switch on the economy between the parties?

BARONE: Voters in these states have seen the effect of heavy government spending, public employee unions dictating public policy and acting as, in the view of Republicans anyway, as parasites sucking the life out of the private-sector economy. They've seen the auto companies, General Motors and Chrysler, go into bankruptcy after long years of adversarial relationships with the United Auto Workers. And instead of rallying to the labor unions, the Democrats that gave the UAW favorable terms on those bankruptcies, they are rallying towards the Republicans. And they're saying, look, if you want a prosperous economy, you need to cut spending. You need to stop this pension burdens on the state.

GIGOT: Well, you know — OK, I can understand that, this economic argument in state like Michigan where the unemployment rate it is 13 percent and you've had a two-term Democratic governor, Jennifer Granholm, who's leaving, not very popular. Let's take a state like Wisconsin where the jobless rate is under 8 percent, 7.9 percent. You don't have the same impact of the auto industry. They've had a two-term governor who is also not very popular, in Jim Doyle, but what about — how do you explain the fact that an incumbent Senator like Russ Feingold is trailing badly in Wisconsin.

BARONE: You've got Russ Feingold, the incumbent Senator, who won three times and he's trailing badly. Tom Barrett, the mayor of Milwaukee, the Democratic —

GIGOT: Right.

BARONE: — nominee is trailing Republican Scott — Mr. Barrett is a very attractive candidate, a nice man.

I think one of the things happening in Wisconsin, Paul, is its foreign policy is having some effect. Wisconsin is part of Germano-Scandanavian- America, settled in large part by Germans, Scandinavians, Norwegians, Swedes, et cetera. Historically, it's been the most dovish or isolationist, pacifist part of the economy. You had 30 member of the House voting against the declaration of war in World War I from the upper Midwest, from Germano-Scandanavian-America.

And I think a lot of those dovish voters voted for Barack Obama. The Democrats in '08 thought he'd immediately withdraw from Iraq, take troops out of Afghanistan, abandon that effort, close Guantanamo and make loving, cooing noises with Ahmadinejad and so forth. It hasn't turned out that way. And I think some of those voters are either, you know, dropping out of the electorate or are voting on other issues where they're more inclined to support the Republicans.

GIGOT: How fascinating. What about the theory I've heard often that President Obama and the Democrats, this time, are doing the worse in those parts of the country, including Ohio and Pennsylvania, where Hillary Clinton beat Barack Obama in the primaries. That is particularly among white voters, middle class, working class, white voters. Do you see any signs of that?

BARONE: Yes, I do see signs of that. I mean, the bottom seems to have dropped out for the Democrats at least Senate Candidate Lee Fisher in northeast Ohio in Cuyahoga County, a particularly messy scandal with — I believe it's the Democratic county chairman and members of the county commission there. You know, payoffs at a Roman Catholic Church and things. That sort of detail that catches your attention. But we saw Barack Obama weak in western Pennsylvania.

GIGOT: Right.

BARONE: In northeast Ohio, he did not score well with ethnics, did not do with he will in Dennis Kucinich's district on the west side of Cleveland.

And I think what we're seeing in the polling evidence is that he's not scoring well there. The white working class that a lot of Democrats like to think is the demographic base of their party, although it hasn't been for quite a few years, seems to be rejecting Barack Obama and his policies by really wide margins. I mean, you've got some surveys that are showing approval of Barack Obama among people that you might classify as white working class, in the neighborhood of 22, 25 percent.

GIGOT: Wow.

BARONE: That's dismal. And he's just not striking the chord with these voters.

The stimulus package of these other measures —

GIGOT: Not popular.

BARONE: — that were designed. They are not popular. Well, they were designed to pump money into public employees. That doesn't do you very much good if you are a private-sector employee, if a skilled tradesman. We've seen male unemployment go higher than female unemployment. I believe this is the first recession period where we've seen that happen. And as we know, male voters are less likely to support Democrats. I think that's moved even more men away from the Obama Democrats.

GIGOT: Michael, we don't have a lot of time, but I want to ask you, there's some talk right now about a comeback, a Democratic comeback, that the base is coming home, finally it's getting energized, the Democratic base. It's clear that President Obama is out there trying to fire them up. Do you see any signs of that? And could that actually save the day for the Democrats?

BARONE: Well, I see a certain amount of signs. The Democratic candidates have been doing better in polls in California in the last ten days. The Ohio governor's race has tightened up. The Republican John Kasich is still ahead. The generic ballot question, which parties do you vote for in the House election, the Republicans' lead has diminished somewhat in your average recent polls.

But overall, then, we're getting results in, like, we get a poll showing Ilario Pantano ahead of Mike McIntyre in the North Carolina 7th district. This is a — Mike McIntyre is a moderate Democrat that got 69 percent of the vote last time. And this poll, showing him getting 46. Now, maybe that's not right. But it's one of many polls showing a close race, a Democratic incumbent in danger in a place where just about nobody in the political (inaudible) inside community had expected to see.

(LAUGHTER)

GIGOT: That includes you, Barone.

All right.

BARONE: Had expected to see. Well, I saw Mr. Pantano a few months ago and thought he might pull a surprise. He's a former Marine and quit Goldman Sachs to enlist in the Marine Corps after 911.

GIGOT: All right, Michael, it will be fascinating to watch.

When we come back, Washington may have put off a decision on tax hikes until after the midterms, but across the country, voters are already feeling the sting as states slap taxpayers with record increases. How does your state measure up? Find out next.

(COMMERCIAL BREAK)

GIGOT: As Washington continues to debate whether to extend the Bush era tax cuts at the end of this year, voters in many part of the country are feeling the sting of state and local tax hikes. Taxes went up in 29 states in 2010 by a whopping $24 billion, the biggest increase since at least 1979. So, how does your state fare?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; assistant editorial page editor, James Freeman; and senior economics writer, Steve Moore.

James, who are the worst offenders?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: The absolute worst offender is California — $10 billion out of the $24 billion of state taxes.

GIGOT: They always do it bigger than everyone else.

FREEMAN: That's right. We hope they're not a trend setter here.

(LAUGHTER)

We're hoping that's the end of the trend. But, yes, big spenders in California, in Sacramento. Also New York, $6 billion out of that 24.

GIGOT: A smattering anywhere else. Connecticut has increased taxes. And Maryland increased taxes. There's quite a number.

Steve, what is the figure? More than a dozen states, right, or close to it?

STEVE MOORE, SENIOR ECONOMICS WRITER: That's right, about a dozen states have raised income and sales tax. And what's interesting about what James just said, think about this, Paul, California and New York are leading the way on tax increases. What do the two states have in common? They have about the deepest recessions. They tried to raise taxes on the rich, Paul. It hasn't worked. It's hurt jobs. And it's caused a tax revolt among everybody, not just rich people.

GIGOT: And yet, the Democrats, Steve, may win both the seats, the California governorship and it looks like they're heavily favored in the New York governorship. How do you explain that?

MOORE: I think that people in New York and California will never learn.

(LAUGHTER)

I think they won't change their policies until the last job has left the state.

(LAUGHTER)

But the other thing that's going on in a lot of the states that I wanted to mention, it's not just the state tax that made voters angry. It's these nickel-and-dime taxes that I see in my state of Virginia, but it's all over the country, everything to beer, wine, cigarettes to telephones to cars, even prostitution and gambling are getting taxed now.

GIGOT: Some of the state legislators, some of the congressional candidates are having to defend the votes in the state legislatures when they voted for tax increases. We have an ad from Indiana. Let's take a look.

(BEGIN VIDEO CLIP)

AD NARRATOR: The next politician you're going to meet, Trent van Haaften. His TV ads will be beautiful, nice pictures, sweet music, but his record not so beautiful. In the state house, Trent van Haaften voted against property tax relief, against saving city taxpayers a half billion dollars in property taxes, against reducing the average homeowners bill by 28 percent. Van Haaften wanted government to keep the money. Call van Haaften. Tell him taxpayers deserve release.

(END VIDEO CLIP)

GIGOT: Is it the lesson, if you vote for it, you have to defend it forever?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: In these days you do. A lot of the states have a constitutional requirement to balance the budget. And you can balance in two ways. You can cut spending or raise taxes. and I don't doubt that some of the states have attempted to cut spending, but their spending levels started from such a high baseline that they do what they think they're able to do on the spending side then they make the up the rest by increasing taxes.

And I think what we've arrived at is a point here in the states like California and New York and Illinois, where the voters understand that this gain cannot go on forever, that the spending baseline can't just ratchet up year after year and then kind of close it with a little more tax increases, property taxes, sales taxes. It's hit the wall. You can't play that game anymore.

GIGOT: This isn't strictly a partisan issue, because you see in some states — Connecticut, Jodi Rell, the Republican governor, big, big tax increase in Connecticut. And Arnold Schwarzenegger came in as a Republican and said he wouldn't raise taxes in California, and went along with a big tax increase.

(CROSSTALK)

GIGOT: This muddies the waters of the election. Is that having an impact on the ground this year as Republicans try to make gains?

FREEMAN: Absolutely, it does. And we showed the ad from Indiana. South Jersey, you see a congressional race where someone is paying for their support of tax increases. But in the big states, I disagree with Steve to say people in California and New York are never leaving. I think they are learning, because — I wouldn't count out Carly Fiorina and Meg Whitman —

MOORE: I agree.

FREEMAN: — in those California races.

GIGOT: Carly Fiorina is running for Senate and Meg Whitman for governor.

FREEMAN: That's right. There is a big reaction against the taxing and the spending. And Fiorina, in particular, in her Senate race, is offering a pro-market, limited-government message against a Democratic incumbent. Most years, this is not a winning idea in California, but she is very competitive. And that's why you see this is an issue.

GIGOT: But, Steve, you know what —

MOORE: Sorry. I was going to say, one thing I find interesting about what's happening in the states, a lot of governors and a lot of voters are looking at what's happening in Virginia and New Jersey, where you have newly elected Republican governors, Chris Christie and Bob McDonald, who, Paul, they balanced their budgets, not by raising taxes, by cutting spending. And that's been pretty popular in those states.

GIGOT: OK, but take Maryland, Martin O'Malley, an incumbent governor, big, big tax increase in an already heavily taxed state. And yet, he is ahead so far of Republican Bob Ehrlich. How do you explain that one, Steve?

MOORE: That's a head scratcher. That's a tough one to figure. Although, I'll say this. That tax increase was two or three years ago. And I think that voters have incorporated that into the model. But I still think that race is going to tighten up. And I wouldn't be surprised if Bob Ehrlich doesn't charge at the end. Maryland's economy is still doing poorly.

HENNINGER: There's still one element we have not mentioned that I've noticed looking through some of the tea leaves here, and that's the popularity of President Obama in these states.

MOORE: Right.

HENNINGER: I mean, one of the governors, who we gave an "A" to, was Governor Manchin of West Virginia.

GIGOT: This is the Cato Institute rating of Governor Manchin, a Democrat, now running for Senate.

HENNINGER: Right. Now running for Senate and in a tight race. Obama's approval rating is something like 49 percent in West Virginia, and so he's having a tough time. His approval rating in Maryland is over 50 percent. And in California it's still up around 53 percent. In Wisconsin, it's really low. And Russ Feingold is probably going to lose the Senate race there. I think the president's popularity and his performance is having a direct effect on these races around the country.

GIGOT: And Manchin, West Virginia's can keep him in the state house and say we don't need to send him to Washington, where he'll just join the Democrats, we'll keep him here.

HENNINGER: Right.

GIGOT: When we come back, the West Wing shake-up. The exodus continues with Rahm Emanuel calling it quits. What does his departure and the departure of most of the president's economic team mean for the Obama agenda going forward?

(COMMERCIAL BREAK)

GIGOT: White House Chief of Staff Rahm Emanuel's announcement this week that he will leave the West Wing to explore the mayoral race in Chicago marks the latest in a string of close Obama aides to head for the exit. with the exception of Treasury Secretary Tim Geithner, the president's entire economic A-Team is gone or going, and there's likely more departures to come, with senior advisor, David Axelrod, and deputy chief of staff, Jim Messina, expected to leave this spring to head up Obama's reelection effort.

We're back with Dan Henninger and Steve Moore. And Washington columnist, Kim Strassel, also joins the panel.

Kim, let me start with a confession. I thought, when President Obama appointed Rahm Emanuel, he was appointed to make sure that his agenda was not dominated by the congressional Democrats. Boy, was I wrong about that one.

(LAUGHTER)

Nancy Pelosi and Harry Reid really did write the bills that became health care and the stimulus. What difference does it make that Rahm Emanuel is leaving now?

KIM STRASSEL, WASHINGTON COLUMNIST: We were all wrong, Paul. You weren't alone. Look at all of these guys that are leaving. It's not just Rahm Emanuel. You had Peter Orszag, who was the budget chief, leave, Christine Romer, who was the top economic advisor, Larry Summers. What characterizes all of these guys is, yes, they were liberals, but they were brought in — a lot of them were viewed as moderates and pragmatic. A lot of them had done good work on things. They were supposed to rein in this president and kind of keep him in check. They have been absolutely sidelined by the political team in the White House that has instead made a lot of decisions — folks like David Axelrod — a lot of decisions that are aimed at instead getting enthusiasm among the base. And it's not been focused on smart economic policy or smart domestic policy. And I think —

GIGOT: Does it matter now that — then, that Emanuel's leaving? Did he have any impact on policy?

STRASSEL: Well, people have two views. Some people say at least he was there making the argument. You know, and I was —

GIGOT: He was arguing, for example, for incremental health care reform. That didn't pan out.

STRASSEL: No.

GIGOT: He was arguing for, for example, that you shouldn't have the terror trial for Khalid Sheikh Mohammed in Manhattan. That didn't work out either, lost that one too.

STRASSEL: Yes, like I said, most if these were sidelined. The argument is, well, they were there making it. But it didn't have much effect in the end. The question now is, who do they get as a replacement and is the president more willing to listen to the people? So far, the signs are no.

GIGOT: Well, Pete Rouse, the former Tom Daschle chief of staff on Capitol Hill, and the deputy chief of staff in the White House now, looks to be the likeliest candidate on an interim basis, and maybe a permanent basis. That's not going to change the so-called insularity of this White House. He's an ultimate insider.

HENNINGER: Well, insularity is hardly the word, Paul. I mean —

(LAUGHTER)

GIGOT: Inside Cleveland, part, not just the inside the beltway.

(LAUGHTER)

HENNINGER: It's the Oval Office. The president sits at the Oval Office. And that desk and that man are running the country and its policies.

GIGOT: So it doesn't matter —

HENNINGER: I don't think it matters. Look, Rahm Emanuel, gave no — you know, he is no shrinking violet.

(CROSSTALK)

(LAUGHTER)

HENNINGER: He gives the word forceful new meaning. He's an in-your- face personality. He was not reluctant to tell the president what he thought.

If he failed, no one could succeed, I don't think, in that role because the president has proven himself to be inflexible. When he went into those backyards this week to talk about economic policy and talk to people who are unemployed, he was basically repeating to them the same agenda that he was talking about the first week of his presidency, such as his clean technologies agenda and things like that.

GIGOT: Right.

HENNINGER: And you know, the reason the Democrats are out there running, having done nothing on the tax cut, is because Barack Obama will not allow taxes to fall for what he calls the wealthiest Americans.

GIGOT: Steve, do you think that this wholesale exodus of the team, and I can't remember when we've had announcements like this before a midterm election, but we do. And they're going to be changing the guard there on economic policy. Any chance it will make a difference on the actual policy?

MOORE: Well, let me say, Paul, I'm from Chicago so I'm hyperventilating about this idea that Rahm Emanuel is going to leave the White House and go run for mayor of Chicago. God forbid he does for Chicago what he's done for the country.

(LAUGHTER)

But, look, on this issue — I've said this consistently. You know the study done a few months ago that showed that Barack Obama has fewer people private-sector business experience in his cabinet than any president in a hundred years.

HENNINGER: None!

MOORE: I think that's been — it's been a total failing. And I think nobody really knows how to meet a payroll, run a business. And you see that in the policies.

(CROSSTALK)

MOORE: So if I were Barack Obama, I would bring in somebody who is a CEO of a company who knows how to run things. and by the way, Paul, somebody who can say no to Barack Obama for the very reasons Dan just mentioned. Nobody will stand up to him in the White House.

GIGOT: There's been mention, reference to the Mulcahy, the former Xerox CEO, who — she said herself she didn't think she'd be a good fit.

But if you're in there with all these political actors and you're just one voice —

(CROSSTALK)

GIGOT: — I mean, is it really going to make a difference, particularly — and this just seems to me to be the key point that Dan makes, which is, if Barack Obama, the president — and he's the boss — if he sets the direction here and he doesn't want to make a change, it doesn't matter who he brings in.

MOORE: Well, that's generally true.

STRASSEL: I think that's right —

MOORE: I'm sorry, Kim, go ahead.

STRASSEL: You've got people like Anne Mulcahy saying she's not a good fit. No doubt, some of these guys are looking at the way the prior economic team was treated and saying, do I really want to do that. And this was — very much driven the argument, well, we'll get a business executive in order to make the business community happy.

GIGOT: We'll see if he does.

We have to take one more break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Time for "Hits and Misses" of the week.

Kim, first to you.

STRASSEL: This is a hit to China's wealthiest man, Zong Qinghou, who was invited to this dinner at which Warren Buffett and Bill Gates tried to convince Chinese tycoons to pledge some of their fortunes to charities. Zong Qinghou did not attend. He is however on record as saying he's skeptical of philanthropy as a tax dodge and thinks really charity it's creating wealth and jobs for society. Obviously, charity does matter, but it was really great to see a businessman out there talking about just how fundamental capitalism is to the general well-being of average people. We could use a few more guys like this in the U.S.

GIGOT: Yes, the Communist capitalists.

(LAUGHTER)

OK, James?

FREEMAN: This is a big miss to your federal government at work, which is forcing New York City to change the fonts and move some capital letters to lower-case letters on its street signs, costing the state of New York $27.6 million. And you can't blame it on President Obama. This is a Bush regulation.

GIGOT: Why are they doing this?

FREEMAN: That's a good question. Theoretically, in that millisecond before you turn, you can read this font better, quicker. But —

GIGOT: Theoretically. OK.

All right, Steve?

MOORE: Paul, this morning, I almost choked on my Cheerios —

(LAUGHTER)

— when I was that the Postal Rate Commission actually denied the postal commission a rate increase. When was the last time Washington has said to a government agency, no, you can't have an increase in your budget, you can't have money. Let's hope it's the start of a big trend in Washington. And while we're at it, why don't we go all the way and privatize the postal service and have them compete directly with Federal Express and UPS.

GIGOT: Dream on, Steve.

(LAUGHTER)

OK, that's it for this week's edition of the "Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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