President Barack Obama called for tax reform as a way to temper drastic automatic budget cuts during his State of the Union address.

“The American people deserve a Tax Code that helps small businesses spend less time filling out complicated forms, and more time expanding and hiring, a Tax Code that ensures billionaires with high-powered accountants can’t work the system and pay a lower rate than their hardworking secretaries, a Tax Code that lowers incentives to move jobs overseas, and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America,” he said. “That’s what tax reform can deliver. That’s what we can do together.”

Obama pointed out that both parties had already worked together to reduce the budget deficit by more than $2.5 trillion over 10 years, more than halfway toward the goal of reducing the deficit by the $4 trillion that economists say is needed to stabilize the nation’s finances. However, the looming automatic budget cuts agreed to in 2011 could harm the economic recovery, he argued.

“In 2011, Congress passed a law saying that if both parties couldn’t agree on a plan to reach our deficit goal, about a trillion dollars’ worth of budget cuts would automatically go into effect this year,” he said in his speech to a joint session of Congress Tuesday night. “These sudden, harsh, arbitrary cuts would jeopardize our military readiness. They’d devastate priorities like education, and energy, and medical research. They would certainly slow our recovery, and cost us hundreds of thousands of jobs. That’s why Democrats, Republicans, business leaders, and economists have already said that these cuts, known here in Washington as the sequester, are a really bad idea.”

Obama noted that some lawmakers in Congress have proposed preventing only the defense cuts by making even bigger cuts to things like education and job training, Medicare and Social Security benefits.

“That idea is even worse,” he said. “Yes, the biggest driver of our long-term debt is the rising cost of health care for an aging population. And those of us who care deeply about programs like Medicare must embrace the need for modest reforms. Otherwise, our retirement programs will crowd out the investments we need for our children, and jeopardize the promise of a secure retirement for future generations. But we can’t ask senior citizens and working families to shoulder the entire burden of deficit reduction while asking nothing more from the wealthiest and the most powerful. We won’t grow the middle class simply by shifting the cost of health care or college onto families that are already struggling, or by forcing communities to lay off more teachers and more cops and more firefighters.

“Most Americans—Democrats, Republicans, and independents—understand that we can’t just cut our way to prosperity,” Obama added. “They know that broad-based economic growth requires a balanced approach to deficit reduction, with spending cuts and revenue, and with everybody doing their fair share. And that’s the approach I offer tonight.”

Obama said that he was prepared to enact some reforms in Medicare that would achieve the same amount of health care savings by the beginning of the next decade as the reforms proposed by the bipartisan deficit reduction commission chaired by former Senator Alan Simpson and former White House chief of staff Erskine Bowles, known as Simpson-Bowles.

Obama pointed out that the Affordable Care Act is already helping to slow the growth of health care costs, and he proposed further reforms to reduce taxpayer subsidies to prescription drug companies and ask more from the wealthiest seniors.

“We’ll bring down costs by changing the way our government pays for Medicare, because our medical bills shouldn’t be based on the number of tests ordered or days spent in the hospital; they should be based on the quality of care that our seniors receive,” he said.”And I am open to additional reforms from both parties, so long as they don’t violate the guarantee of a secure retirement. Our government shouldn’t make promises we cannot keep, but we must keep the promises we’ve already made.”

To hit the rest of the deficit reduction target, Obama said lawmakers should do what leaders in both parties have already suggested, and save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and the well-connected.

“After all, why would we choose to make deeper cuts to education and Medicare just to protect special interest tax breaks?” he asked. “How is that fair? Why is it that deficit reduction is a big emergency justifying making cuts in Social Security benefits but not closing some loopholes? How does that promote growth? Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit. We can get this done.”

Obama acknowledged that tax reform and entitlement reform would not be easy. “The politics will be hard for both sides,” he said. “None of us will get 100 percent of what we want. But the alternative will cost us jobs, hurt our economy, visit hardship on millions of hardworking Americans. So let’s set party interests aside and work to pass a budget that replaces reckless cuts with smart savings and wise investments in our future. And let’s do it without the brinksmanship that stresses consumers and scares off investors. The greatest nation on Earth cannot keep conducting its business by drifting from one manufactured crisis to the next. We can't do it.”

Obama offered a number of ways to create more jobs in the U.S. and expand the economy. He called on Congress to pass the rest of the American Jobs Act that he proposed a year and a half ago, saying it would create more than 1 million new jobs.

To create more manufacturing jobs, he asked Congress to create more “manufacturing innovation institute” modeled after one created last year in Youngstown, Ohio.

“A once-shuttered warehouse is now a state-of-the art lab where new workers are mastering the 3D printing that has the potential to revolutionize the way we make almost everything,” he said. “There’s no reason this can’t happen in other towns. So tonight, I’m announcing the launch of three more of these manufacturing hubs, where businesses will partner with the Department of Defense and Energy to turn regions left behind by globalization into global centers of high-tech jobs. And I ask this Congress to help create a network of 15 of these hubs and guarantee that the next revolution in manufacturing is made right here in America. We can get that done.”

Obama also called on Congress to invest more in research, pointing out that every dollar that was invested to map the human genome returned $140 to the economy. “Today, our scientists are mapping the human brain to unlock the answers to Alzheimer’s,” he said. “They’re developing drugs to regenerate damaged organs; devising new material to make batteries 10 times more powerful. Now is not the time to gut these job-creating investments in science and innovation. Now is the time to reach a level of research and development not seen since the height of the Space Race. We need to make those investments.”

Climate Change
In particular, he called for more investment in clean energy sources such as wind and solar energy to combat climate change. “For the sake of our children and our future, we must do more to combat climate change,” he said. “Now, it’s true that no single event makes a trend. But the fact is the 12 hottest years on record have all come in the last 15. Heat waves, droughts, wildfires, floods—all are now more frequent and more intense. We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence. Or we can choose to believe in the overwhelming judgment of science—and act before it’s too late.”

Obama said it was possible to make meaningful progress on the issue of climate change while driving strong economic growth. “I urge this Congress to get together, pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago,” he said. “But if Congress won’t act soon to protect future generations, I will. I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.”

Obama pointed out that last year, wind energy added nearly half of all new power capacity in America. “So let’s generate even more,” he added. “Solar energy gets cheaper by the year. Let’s drive down costs even further. As long as countries like China keep going all in on clean energy, so must we.”

Obama also called for research into making natural gas safer to produce without damaging water supplies. “In the meantime, the natural gas boom has led to cleaner power and greater energy independence,” he said. “We need to encourage that. And that’s why my administration will keep cutting red tape and speeding up new oil and gas permits. That’s got to be part of an all-of-the-above plan. But I also want to work with this Congress to encourage the research and technology that helps natural gas burn even cleaner and protects our air and our water.”

He pointed out that much of the new-found energy is drawn from lands and waters that the public owns, and he proposed to use some oil and gas revenues to fund an Energy Security Trust that will drive new research and technology to shift cars and trucks off of oil for good. “If a nonpartisan coalition of CEOs and retired generals and admirals can get behind this idea, then so can we,” he said. “Let’s take their advice and free our families and businesses from the painful spikes in gas prices we’ve put up with for far too long.”

Obama also set a goal of cutting in half the energy wasted by homes and businesses over the next 20 years. “We'll work with the states to do it,” he said. “Those states with the best ideas to create jobs and lower energy bills by constructing more efficient buildings will receive federal support to help make that happen.”

Obama also called for investment in repairing the nation’s infrastructure to make it more attractive to businesses that want to build and expand their facilities. “He proposed a “Fix-It-First” program to put people to work as soon as possible on the most urgent repairs, such as the nearly 70,000 structurally deficient bridges across the country. “To make sure taxpayers don’t shoulder the whole burden, I’m also proposing a Partnership to Rebuild America that attracts private capital to upgrade what our businesses need most: modern ports to move our goods, modern pipelines to withstand a storm, modern schools worthy of our children,” he said. “Let’s prove that there’s no better place to do business than here in the United States of America, and let’s start right away. We can get this done.”

Obama called for rebuilding the housing sector, pointing out that home prices are rising at the fastest pace in six years, with home purchases up nearly 50 percent, and construction expanding again.

“But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected,” he added. “Too many families who never missed a payment and want to refinance are being told no. That’s holding our entire economy back. We need to fix it.”
He noted that there is a bill in Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today’s rates. “Democrats and Republicans have supported it before, so what are we waiting for?” he asked “Take a vote, and send me that bill. Why would we be against that? Why would that be a partisan issue, helping folks refinance? Right now, overlapping regulations keep responsible young families from buying their first home. What’s holding us back? Let’s streamline the process, and help our economy grow.”

Education Reforms
Obama also urged Congress to agree to provide more investment in education to encourage more children to be enrolled in preschool programs. “Study after study shows that the sooner a child begins learning, the better he or she does down the road,” he said. “But today, fewer than 3 in 10 four year-olds are enrolled in a high-quality preschool program. Most middle-class parents can’t afford a few hundred bucks a week for a private preschool. And for poor kids who need help the most, this lack of access to preschool education can shadow them for the rest of their lives. So tonight, I propose working with states to make high-quality preschool available to every single child in America. That's something we should be able to do.”

He pointed out that every dollar invested in high-quality early childhood education can save more than seven dollars later on by boosting graduation rates, reducing teen pregnancy, and even reducing violent crime. “In states that make it a priority to educate our youngest children, like Georgia or Oklahoma, studies show students grow up more likely to read and do math at grade level, graduate high school, hold a job, form more stable families of their own,” Obama added.
“We know this works. So let’s do what works and make sure none of our children start the race of life already behind. Let’s give our kids that chance.”

Obama also called for providing more technical training programs for high school students, noting that countries like Germany focus on graduating their high school students with the equivalent of a technical degree from an American community college so they are ready for a job when they graduate high school. He pointed to the example of schools like P-Tech in Brooklyn, a collaboration between New York City public schools, the City University of New York and IBM, in which students will graduate with a high school diploma and an associate's degree in computers or engineering. “We need to give every American student opportunities like this,” he said.

Obama announced a new challenge to redesign America’s high schools so they better equip graduates for the demands of a high-tech economy. “We’ll reward schools that develop new partnerships with colleges and employers, and create classes that focus on science, technology, engineering and math—the skills today’s employers are looking for to fill the jobs that are there right now and will be there in the future,” he said.

Obama also called for ways to encourage colleges to reduce the skyrocketing cost of higher education. “Through tax credits, grants and better loans, we’ve made college more affordable for millions of students and families over the last few years,” he said. “But taxpayers can’t keep on subsidizing higher and higher and higher costs for higher education. Colleges must do their part to keep costs down, and it’s our job to make sure that they do. So tonight, I ask Congress to change the Higher Education Act so that affordability and value are included in determining which colleges receive certain types of federal aid. And tomorrow, my administration will release a new ‘College Scorecard’ that parents and students can use to compare schools based on a simple criteria—where you can get the most bang for your educational buck.”

Obama also called for immigration reform to provide a pathway to citizenship. “Real reform means strong border security, and we can build on the progress my administration has already made—putting more boots on the Southern border than at any time in our history and reducing illegal crossings to their lowest levels in 40 years,” he said. “Real reform means establishing a responsible pathway to earned citizenship—a path that includes passing a background check, paying taxes and a meaningful penalty, learning English, and going to the back of the line behind the folks trying to come here legally. And real reform means fixing the legal immigration system to cut waiting periods and attract the highly-skilled entrepreneurs and engineers that will help create jobs and grow our economy.”

Obama urged Congress to pass the Paycheck Fairness Act this year to enable women to earn comparable wages as men. He also urged Congress to raise the minimum wage to $9.00 an hour and tie it to the cost of living.

“We know our economy is stronger when we reward an honest day’s work with honest wages,” he said. “But today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong. That’s why, since the last time this Congress raised the minimum wage, 19 states have chosen to bump theirs even higher. Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. We should be able to get that done.”

Obama also called for changes in gun laws to reduce gun violence as many members of Congress wore green ribbons in memory of the shooting victims of Sandy Hook, Conn.

“Overwhelming majorities of Americans—Americans who believe in the Second Amendment —have come together around common-sense reform, like background checks that will make it harder for criminals to get their hands on a gun,” he said. “Senators of both parties are working together on tough new laws to prevent anyone from buying guns for resale to criminals. Police chiefs are asking our help to get weapons of war and massive ammunition magazines off our streets, because these police chiefs, they’re tired of seeing their guys and gals being outgunned.”

Republican Response
In the Republican response, Sen. Marco Rubio, R-Fla., objected to the tax reforms proposed by Obama.

“Mr. President, I still live in the same working class neighborhood I grew up in,” he said. “My neighbors aren’t millionaires. They’re retirees who depend on Social Security and Medicare. They’re workers who have to get up early tomorrow morning and go to work to pay the bills. They’re immigrants, who came here because they were stuck in poverty in countries where the government dominated the economy. The tax increases and the deficit spending you propose will hurt middle-class families. It will cost them their raises. It will cost them their benefits. It may even cost some of them their jobs. And it will hurt seniors because it does nothing to save Medicare and Social Security. So Mr. President, I don’t oppose your plans because I want to protect the rich. I oppose your plans because I want to protect my neighbors.” 

Rubio argued that economic growth is the best way to help the middle class. “Unfortunately, our economy actually shrank during the last three months of 2012,” he pointed out. “But if we can get the economy to grow at just 4 percent a year, it would create millions of middle class jobs. And it could reduce our deficits by almost $4 trillion dollars over the next decade.  Tax increases can’t do this. Raising taxes won’t create private sector jobs. And there’s no realistic tax increase that could lower our deficits by almost $4 trillion. That’s why I hope the President will abandon his obsession with raising taxes and instead work with us to achieve real growth in our economy.”