This is a rush transcript from "The Journal Editorial Report," December 18, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," Obama-care legal challenges gain steam. A Virginia court rules against the individual mandate as another suit advances in Florida. We'll talk to the lead attorney in that case.

Plus, call it a pre-Christmas miracle. The House passes the tax cut deal and Harry Reid is forced to pull his omnibus spending monster in the face of certain defeat. Could things really be changing in Washington?

And governors wage war on public-sector unions as bloated pay, pensions, and benefits threaten to bankrupt struggling states.

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

Obama-care suffered a major setback this week when a Virginia court ruled that the law's lynchpin, that the Americans purchase insurance, or pay a penalty, is unconstitutional. A federal district court judge, Henry Hudson, declared that the so-called individual mandate exceeds the authority granted to Congress under the Commerce Clause. The Virginia ruling the same week as another legal challenge gets underway in Florida. More than 20 state attorneys general are suing in federal court there, where oral arguments were heard on Thursday.

Attorney David Rivkin is the legal counsel in that suit and he joins me now.

David Rivkin, welcome back to the program. Very good to have you here.


GIGOT: Lets' talk about the Virginia case first. How significant is it from your point of view that a judge struck down the individual mandate?

RIVKIN: It's very significant. It's a good opinion. And it certainly demonstrates that more than one federal court finds heart of this law, the individual mandate, to be constitutionally objectionable. There are issues and opinion that it's not as broad as we would have liked, namely, it only, Paul, strikes down the individual mandate and not the rest of the statute. And it does not provide for injunctive relief. It basically provides for declaratory judgment that the act is unconstitutional. But it's a good start.

GIGOT: You think this guarantees that the case will eventually end up at the Supreme Court?

RIVKIN: Absolutely. I believe that our case will end up before the Supreme Court and so will Virginia's case. The question is when and in what context.

GIGOT: All right. One of the issues here was whether or not the government can legislate for inactivity, that is for doing nothing, for not buying insurance. Is this the core of the case in dispute in your view?

RIVKIN: It is, and it's very important to underscore, Paul. This is beyond the health care. The fundamental question is this, can the federal government exercise general police power, namely, take individuals not engaged in commerce or engaged in economic activities and compel them to do so. This is quintessentially a police power, that's what states can do.


GIGOT: Under the Constitution — under the Constitution, the states have that —

RIVKIN: — transformed our constitutional architecture. We have given the federal government the power that only the state can have. And in the process, we harmed individual liberty. Remember, the reason state sovereignty matters is not just for the sake of the state, the framers wanted to diffuse power, both vertically between the federal government and the states as well as horizontally among different branches of the federal government, to prevent the concentration of power in any one set of hands. And that's really the heart of our constitutional architecture.

GIGOT: OK. But the government argues, look, everybody gets sick eventually and everybody needs medical care eventually. and since the federal government pays for an awful lot of that care, particularly through Medicare and other public programs, that, in essence, not buying insurance is a form of economic activities. You're putting the burden on others. And you're just not agreeing to pay in yourself. What's your response to that argument?

RIVKIN: We got into it heavily in the hearing yesterday, earlier stages of our cases. It's a totally specious argument. The government is basically saying, because you, in the future, may do something that imposes a burden on others — OK, they call it cost shifting — because of that, the government can require you to buy insurance to do that. First of all, that problem is endemic, the possibility of cost shifting, Paul, across all market segments. Look at the subprime mortgage. Look at the fact that over $70 billion worth of credit card bills don't get paid every year.


GIGOT: Somebody's paying those bills.

RIVKIN: Billions of dollars wiped out in bankruptcy. What do you think happens with all that money? They get passed on to the market participants. There's no limiting principle under that theory, the government can require people to purchase insurance to mitigate against any possible future occurrences.

Let's be honest, this is not about that at all, and I think the judge understood that clearly. This is an effort to get the middle class to put in more money to cover the poor. The only way the government could have done it legitimately, redistribute the wealth, if you will in our constitutional system, is impose a tax, collect it and then give people subsidies. What you cannot do is have a mandate that compels people to do that. That is both constitutional and — really, politically, think about it, this is the way you do it without paying the political price for it. Of course, the people that did it paid some price —


GIGOT: Listen, I want to pursue — I want to—

RIVKIN: — had been more prohibitive.

GIGOT: I want to pursue this point about the tax. During the debate over Obama-care, the president said it was not a tax. It was not a tax increase penalty. But now, in the legal arguments, the Justice Department is saying clearly that in fact it is a tax. It's not a penalty that's unusual. And in fact, in that sense, it's constitutional because we know that all kinds of other taxes are legal and constitutional. What's your response to that?

RIVKIN: That's not what they did. As a matter of fact, in our case, in the Virginia case, the judge reached this question in his opinion just earlier in the week. In our case, the judge reached this question and decisively disposed of it quite a long time ago. Basically, that's not what Congress did.

We also made arguments that this is an unconstitutional way of imposing a tax, but forget that. The fundamental point is that the president and all the people who enacted the statute have said decisively this is not a tax. You cannot play this bait and switch. I think it's deplorable. What it does, it kind of plays a bad joke on the citizenry. It tells them at the front end, we're exercising this power. And then when you get into court, you make those legal arguments.

As a matter of fact, what the Justice Department has done in this case continuously, Paul, is they have rewritten the statute. And that's the point we made a couple of times.

GIGOT: Yesterday.

RIVKIN: Instead of defending the statute as Congress wrote it, they keep rewriting the statute to try to make it more palatable in terms of legal defensibility.

GIGOT: All right. Quickly, you have 20 states in your lawsuit. How many do you expect to get in the end, after the new governors and attorneys general take office in January?

RIVKIN: At least five or six, more than 25 states, which is important from a symbolic perspective.

GIGOT: I can't remember a case where so many states have directly challenged the federal government on a single law.

David Rivkin, we'll be following this closely.

Thanks for being here.

RIVKIN: Good to be with you.

GIGOT: When we come back, Christmas came early this week as the House votes to extend the Bush-era tax rates and Harry Reid is forced to pull his pork-laden, $1.2 trillion dollar spending blowout. Is there a message in these victories for the GOP and the 112th Congress?


GIGOT: Well, call it a pre-Christmas miracle. A tax-and-spend reversal the likes of which are rarely seen on Capitol Hill. Senate Majority Leader Harry Reid was forced Thursday night to pull his pork- laden, 2000-page, $1.2 trillion spending bill. And just hours later, the House voted to extend the Bush-era tax rates for all income levels. Could things really be changing in Washington?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; senior editorial page writer, Joe Rago; and Washington columnist, Kim Strassel.

Kim, I thought I'd seen everything in politics.


I've been around long enough to have seen lots. This is amazing. A Democratic Congress extends the Bush takes rates first. Amazing enough. And then the spending breakdown by the Democrats. What happened on that spending bill?

KIM STRASSEL, WASHINGTON COLUMNIST: What happened is Harry Reid decided to pull this omnibus bill. It was a $1.2 trillion bill, 6,000 earmarks, and they were going to try and jam it through in just a few days before anyone could read it through. And what ended up happening is a lot of the Republicans in the Senate, who had been tempted to vote for this thing, they got a lot of grass-roots pressure, a lot of argument back from Mitch McConnell, and they decided they weren't going to do it. The Republicans stayed unified and the Democrats had no choice but to pull this.

GIGOT: Some of these Republicans, Kim, were going to retire. I think three or four are leaving the Senate with the new year. This was the last hurrah so they wanted to bring home the bacon to the home states.


GIGOT: Maybe for this or that Senator monument here or there across the state with their name on it. But what argument did McConnell make in those — in the room to say, look, don't do this, don't vote for this, don't give Harry Reid a victory?

STRASSEL: There is the argument, especially for retirees, do you really want your last vote to be a joke of a bill that nobody has read?

But there's also — look, here is the thing. The big power that Republicans got in the last election is the ability to write spending bills. and that's what they're going to be able to use to cut back on Obama priorities, like Obama-care and other programs, and fulfill their promises to the public to cut back spending.

The problem with the omnibus, it would have tied their hands to do any of that until next September. And I think that's what McConnell argues with, guys, do you really want to hamstring colleagues that are coming back to do that.

GIGOT: Right.

Because the spending, Joe, would have been built into the baseline for next year, so Republicans coming in next year with the House majority would have had to cut spending from that baseline, making it that much more difficult, especially on the pre-funding of Obama-care.

JOE RAGO, SENIOR EDITORIAL PAGE WRITER: Yes, there were all sorts of spending mechanisms in this bill. And if they wanted any hope of rationalizing entitlements, of rolling back the new priorities, this really would have caused a problem for them.

GIGOT: I want to salute Thad Cochran, the ranking members of the Appropriations Committee, from Mississippi. This is a rare event for me.


But he basically walked away from hundreds of millions of earmarks for his state, take one for the team, if you will, which is unheard of for an appropriator of either party.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: I think we should try to understand what's going on here. The spin this morning is that this is victory for fiscal conservatives and Tea Partiers. Well, I guess it's that, but—

GIGOT: It sure is.


HENNINGER: But you know what? Congress' approval rating is down in the teens.

GIGOT: 13.

HENNINGER: Yes, 13. That number represents more than fiscal conservatives and Tea Partiers.


It represents a lot of people.

GIGOT: Here is the question: Who are the 13?


GIGOT: What in the world are they smoking? I mean—


HENNINGER: But this is just a building block. This is a stepping stone into next year. And I have to say, I'm allowing myself to feel pretty optimistic about it. Some of these people leaving, like George Voinovich and —

GIGOT: Ohio Senator and Missouri Senator.

HENNIGER: Ohio Senator. Well, take George Voinovich, an Ohio Republican, he's leaving and being replaced by Rob Portman, another Ohio Republican. It is night and day between George Voinovich and Rob Portman.


HENNINGER: Russ Feingold is leaving Wisconsin and replaced by Ron Johnson. The team that Mitch McConnell is going to get, takes the fight next year, is much stronger than the one he had this year.

GIGOT: Kim, let's talk about the tax bill as well, because a week ago —

STRASSEL: Another miracle.

GIGOT: I know. But a week ago, the Democrats were in a revolt in the House and saying, we won't pass this, we — it has to be amended, this is an outrage. And in the end, something like 277 Democrats in the House voted for it. 81 Senators voted for it. So, what happened to have all of that opposition melt away?

STRASSEL: What you had is — everyone basically needed to work through the issues publicly, so we had to do that for about a week, and let the liberal Democrats, in particular, complain about the estate tax provisions and carrying on tax rates for all individuals. But in the end, Democrats had to make the choice. were they going to basically undercut their president, who made the deal, and also end up being the people who were responsible for raising taxes on every American in the end, and in the end, a lot of them decided, OK, that's not really necessarily a vote I want to take.

GIGOT: Dan, how big an intellectual and political turn does this bill and this week, really, the tax bill in particular make? Have we made a turn back towards growth economics, at least partially?

HENNINGER: I think so, Paul. And I think so, because so many people in Washington — again, we cite the Bowles-Simpson commission, which was really —

GIGOT: The Deficit Commission.

HENNINGER: The Deficit Commission, which at its base, is a pro- growth, pro-competition plea. and there are a lot more people who have, I think, gotten the idea that the United States is somewhat dead in the water right now with this impossible tax system that we've got now.

GIGOT: Right.

HENNINGER: The omnibus spending bill that you just dump out in December. The United States is a serious country. It can't compete on that basis. So I think maybe we are beginning to see the winds gathering around the pro-growth agenda.

GIGOT: I think what you're seeing is the left wing of the Democratic Party has been marginalized on policy. They just can't deliver anything. So Obama's being forced now to negotiate with people like Paul Ryan. And the arc of policy is changing in a very fundamental way. I think it's a very good development for the economy.

Well, as all eyes on the political shenanigans in Washington, there's a revolution brewing in the states too, as governors for both parties take on the public-sector unions, whose pay, pension, and benefits are draining the public purse (ph).


GIGOT: Finally this week, an update on the battle to rein in public- sector unions whose pay, pensions and health benefits are bankrupting some of the biggest states in the country. New Jersey Governor Chris Christie's crusade has been well documented. But in Monday's "Wall Street Journal," Minnesota Republican governor and presidential possible, Tim Pawlenty, came out swinging as well, calling the rise of government unions "a silent coup, an inside job engineered by self-interested politicians, and fueled by campaign contributions." And neighboring Wisconsin's incoming Republican governor, Scott Walker, may have to try to end collective bargaining for public workers in his state. And it's not just Republicans. New York's incoming Democratic Governor Andrew Cuomo is gearing up for a battle with the state's powerful public-sector union in an effort to close and $8 billion deficit next year.

So, Joe, really interesting developments across the state. What's driving it?

RAGO: Well, you know, I think the money has just run out. You know, there's sort of this triangle of public-sector years, higher taxes and ever-larger entitlements, and there's no money left. even the Democratic governors are looking at this and saying, you know — Andrew Cuomo, for instance, is partnering with Gerry LaBarbera (ph), who is the head of New York's largest construction trades union.

GIGOT: A public — a private-sector union.

RAGO: A private-sector union. And they're looking at the budget and saying, the government can't build roads and can't build —

GIGOT: Interesting. That's a fascinating political point. It means that private union workers feel that they now are getting taken to by the public unions, who have the power to raise taxes constantly and it comes out of their paychecks.

HENNINGER: Yes. Well, we're going to see that fight unfold here in New York State as Andrew Cuomo apparently is going to take on the public unions. The teachers union, just as they did with Chris Christy in New Jersey, are gearing up to run ads against Andrew Cuomo. Cuomo is making — reaching out to the private unions to see if they'd be willing to run counter ads against those. This is an unprecedented turn.

GIGOT: Kim, one of the issues here, the states aren't going to get more money from Washington, are they? I mean, the stimulus spending included multiple billions, hundreds of billions really, for the states. That's done. That's for coming again, is it?

STRASSEL: Right. No, and you might call this the one small political upside of this recession is, as Joe says, the money has run out, but it has finally focused public attention on this. And look, the numbers here are astonishing. Since the beginning of 2008, the private sector has lost eight million jobs. But the government, state, local and federal, added 600,000 positions and the —

GIGOT: This —

STRASSEL: 600,000. The average federal employee earns $123,000 in pay and benefits. That's twice what the private sector employee gets. And they are in programs that private sector employees have not seen in ages, things like fully funded pensions.

GIGOT: Right.

STRASSEL: And so, you're seeing public outrage over this as well, which is driving it. And in particular, the move to modernize some of these programs in addition to cut back on some of these public programs.

GIGOT: This collective bargaining issue, Joe, is fascinating because the public-sector workers haven't always had collective bargaining. In California, it happened as recently as 1978. John Kennedy gave it to federal workers in 1962. This movement to claw that back, it's fascinating. Is it going to succeed?

RAGO: It's going to be a tough fight, but I think the actual public, as opposed to the public sector unions, are actually on the side of this. There was a — in 2006, John Corzine, then the governor of New Jersey, spoke to this big rally.

GIGOT: About 10,000 people, if I recall.

RAGO: — of the labor movement, and said, you know, we'll fight to get you a fair deal. And he was really supposed to be on the other side of the table.

GIGOT: Representing taxpayers.

RAGO: Exactly. I think that people are looking at this and saying —


— you know, something is wrong here.

GIGOT: This is why the incentives are so different in the public sector versus the private sector. And in fact, FDR and —

HENNINGER: Franklin Delano Roosevelt was inalterably opposed to collective bargaining as was —

GIGOT: For public workers.

HENNINGER: For public workers.

GIGOT: Not for private.

HENNINGER: That's exactly right. Roosevelt said it was a violation of state sovereignty, by which he meant the state represented all the citizens in the state, unlike a private company, which just has a discrete number of citizens. And it was unacceptable for a faction or group to try to collective bargain against all the people of a state. And I think that chicken has clearly come home to roost that FDR warned us about.

GIGOT: Joe, Tim Pawlenty must think there's a political opportunity here. Are you going to see, do you think, more of the presidential candidates come out and do that. I guess, no Democrats will run, but I guess at the state level. Jerry Brown in California is a Democrat who looks like he is going to do this.

RAGO: Jerry Brown introduced collective bargaining in the 1970s in his first stint as governor.

GIGOT: He signed the bill.

RAGO: This week, he gave a speech to the teachers union saying, you've been living in fantasy land. We have a major fiscal problem here. So I wouldn't be surprised if you see the Democrats, especially on education, coming out and taking on these unions. And certainly, there's going to be a lot of competition among Republicans to sort of — to come up with creative solutions to this problem.

GIGOT: When there is no money, there's no alternative.

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


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

Dan, first to you.

HENNINGER: Paul, this week's Food and Drug Administration recommended that the anti-cancer drug, Avastin, no longer be approved for the treatment of breast cancer, despite the fact that many, many anti-cancer groups petitioned them to leave it on the market. This reminds me of sort of the things that happened in the early stages of AIDS, when you had AIDS patients begging the FDA, demonstrating outside of the building to approve the things. I have to say, I think only under an Obama Food and Drug administration could this policy roll as far downhill as it has with this position.



RAGO: Paul, this week, Peter Orszag, who left the senior position at the White House for a senior position at Citigroup, a bank that wouldn't exist without taxpayer support. One reason voters distrust big business almost as much as government is it's so hard to tell them apart.


All right.

Kim Strassel?

STRASSEL: Hey, this is a miss for the Justice Department. We're going on a month since the WikiLeaks released hundreds of diplomatic cables that injured the United States. And yet, despite the fact that its leader, Julian Assange, got out on bail in Britain this week, despite the fact that WikiLeaks intends to release thousands more of these, the Justice Department has not moved. I'm not quite sure what could be more important right now than the United States' general security and our troops' safety.

GIGOT: I'd like to see one of the breast cancer marches on Washington.

RAGO: It could happen. It could happen.

GIGOT: All right.

Remember, if you have your own "Hit or Miss," please send it to us at jer@FOXnews.com.

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 all right here next week.

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