Ah! I did it!

Here's how I got it to work:

from typing import Type, TypeVar
from django.test import TestCase, TransactionTestCase

T = TypeVar("TBTC", TestCase, TransactionTestCase)

def test_case_class_factory(base_class: Type[T]) -> Type[T]:

    class MyDerivedTestCase(base_class):
        ...

    return MyDerivedTestCase

TracebaseTestCase = test_case_class_factory(TestCase)
TracebaseTransactionTestCase = test_case_class_factory(TransactionTestCase)

As soon as I removed the type hints from the declared variables (TracebaseTestCase and TracebaseTransactionTestCase), they went from blue to green, and the syntax highlighting started working in subsequent derived classes!

I realized that setting the factory method to output -> Type[TestCase], was static, and that I could use a TypeVar to make it dynamic. I'm not sure I totally understand all of this. For example, I don't know what the significance of the first argument to TypeVar is, but I think I learned one thing:

"TracebaseTestCase: TestCase = ..." was wrong. It was type-hinting TracebaseTestCase as an instance of TestCase, not a type/class. That's why it was highlighted blue.

And I'm not sure I understand if VSCode could know what type TracebaseTestCase is if I don't type-hint it: TracebaseTransactionTestCase = test_case_class_factory(TransactionTestCase). Can it? I.e. Can it differentiate between the presence of assertQuerySetEqual as a method of the class?