WASHINGTON DC – President Obama urged Congress to work across party lines on an overhaul of both corporate and individual taxes to reduce tax loopholes during his State of the Union address on Tuesday night.

“Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries,” he said. “Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change. So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years—without adding to our deficit.”

Obama also called for simplifying the individual tax code. “In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code,” he said. “This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.”

Obama cited some of the progress made in the past year on taxes during his hour-long speech, including the budget deal he worked out last month to extend the Bush-era tax cuts. “Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today,” he said. “Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.”

However, Obama cautioned that the tax cuts extension should not be made permanent for the wealthy in order to deal with the growing budget deficit. “And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2 percent of Americans,” he said. “Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break. It’s not a matter of punishing their success. It’s about promoting America’s success.”

However, Obama did call for making the tuition tax credit permanent. “To compete, higher education must be within reach of every American,” he said. “That’s why we’ve ended the unwarranted taxpayer subsidies that went to banks, and used the savings to make college affordable for millions of students. And this year, I ask Congress to go further, and make permanent our tuition tax credit—worth $10,000 for four years of college.”

He described the efforts he planned to rein in spending and tackle the budget deficit by freezing annual domestic spending over the next five years, making cuts in programs such as defense, and consolidating government agencies that deal with matters such as exports and housing policy. However, he also emphasized the need to invest more money in education, technology, infrastructure, transportation, and clean energy development to ensure U.S. competitiveness against other countries, likening it to the space race against the Soviet Union.

“This is our generation’s Sputnik moment,” he said.

Obama suggested the money for clean energy technology could come from rolling back tax breaks and other federal aid for the oil industry. “With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have 1 million electric vehicles on the road by 2015,” he said. “We need to get behind this innovation. And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. I don’t know if you’ve noticed, but they’re doing just fine on their own. So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.”

He cited the work of the bipartisan deficit commission as a starting point for negotiations on how to control the budget deficit. “The bipartisan Fiscal Commission I created last year made this crystal clear,” he said. “I don’t agree with all their proposals, but they made important progress. And their conclusion is that the only way to tackle our deficit is to cut excessive spending wherever we find it – in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes.”

Obama also called for Republicans and Democrats to work together to improve the health care reform law, but not to fight battles over repealing the law. He indicated his willingness to repeal the expanded 1099 reporting provisions, however. “Now, I’ve heard rumors that a few of you have some concerns about the new health care law,” he said. “So let me be the first to say that anything can be improved. If you have ideas about how to improve this law by making care better or more affordable, I am eager to work with you. We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.”

In the official Republican response to Obama’s speech, Rep. Paul Ryan, R-Wis., emphasized the dangers of the growing budget deficit and the need to control spending. “Our nation is approaching a tipping point,” he warned. “We are at a moment where if government’s growth is left unchecked and unchallenged, America’s best century will be considered its past century.”

Another Republican lawmaker, Rep. Michele Bachmann, R-Minn., delivered the first-ever Tea Party Caucus response to the State of the Union address after Ryan spoke, emphasizing the growth in the unemployment rate and the budget deficit after Obama took office. However, she agreed with the need to reduce corporate taxes. “We need to start making things again in this country, and we can do that by reducing the tax and regulatory burden on job-creators,” she said. “America will have the highest corporate tax rate in the world. Think about that. Look no further to see why jobs are moving overseas.”

By Michael Cohn