WASHINGTON (Reuters) ? President Barack Obama used his last State of the Union speech before the November election to paint himself as the champion of the middle class, by demanding higher taxes for millionaires and tight reins on Wall Street.
Taking advantage of a huge national platform to make the case for his re-election, Obama on Tuesday defiantly defended his record after three years in office and laid blame for many of the country's woes at the feet of banks and what he called an out-of-touch Congress.
He proposed sweeping changes in the tax code and new remedies for the U.S. housing crisis, setting as a central campaign theme a populist call for greater economic fairness.
He mentioned taxes 34 times and jobs 32 times during his hour-long speech, emphasizing the two issues at the heart of this year's presidential campaign.
While the biggest proposals in Obama's speech are considered unlikely to gain traction in a deeply divided Congress, the White House believes the president can tap into voters' resentment over the financial industry's abuses and Washington's dysfunction.
But even as he called for a "return to American values of fair play and shared responsibility," Obama seemed to put no blame on himself for a still-fragile economic recovery and high unemployment that could trip up his re-election bid.
With polls showing most Americans disapprove of his economic leadership, he still faces the stiff challenge of convincing them that the candidate who was swept into the White House in 2008 promising hope and change now deserves another term.
Standing before a joint session of Congress, Obama unleashed a partisan attack over taxes and vowed no return to "the days when Wall Street was allowed to play by its own set of rules."
"Washington should stop subsiding millionaires," Obama declared as he proposed a minimum 30 percent effective tax rate on those who earn a million dollars or more.
Obama said he would ask his attorney general to establish a special financial crimes unit to prosecute those parties charged with breaking the law, and whose fraud contributed to the 2007-2009 financial crisis that plunged the United States into recession.
Obama's message could resonate in the 2012 campaign following the release of tax records by Mitt Romney, a potential Republican rival and one of the wealthiest men ever to run for the White House. He pays a lower effective tax rate than many top wage-earners.
A new proposal outlined by Obama to ease the way for more American homeowners to get mortgage relief - and to pay for the plan with a fee on banks blamed for helping create the housing crisis - also struck a populist note.
Democrats have hammered Republicans in Congress for supporting tax breaks that favor the wealthy. Republicans staunchly oppose tax hikes, even on the richest Americans, arguing they would hurt a fragile economic recovery.
"No feature of the Obama presidency has been sadder than its constant efforts to divide us, to curry favor with some Americans by castigating others," Indiana Governor Mitch Daniels said in the Republican response to Obama.
House of Representatives Speaker John Boehner, the top congressional Republican, insisted the election would be a referendum on the president's "failed" policies.
The U.S. unemployment rate was 8.5 percent in December. No president in the modern era has won re-election with the rate that high.
CHEERS AND SILENCE
Obama's rhetoric and his audience's response was more overtly partisan than last year when both sides sought a tone of
civility in the aftermath of an assassination attempt on Democratic Arizona lawmaker Gabrielle Giffords.
In the most emotional moment of the evening, Obama warmly embraced Giffords as he made his way to the podium. The congresswoman, who has made a remarkable recovery after being shot in the head, announced on Sunday she was retiring from Congress.
The response to Giffords was one of the few moments of bipartisan enthusiasm in a Congress riven by antagonism.
Democrats rose en mass to cheer, and Republicans stayed seated in stony silence, when Obama vowed to "oppose obstruction with action." But both sides applauded when Obama called for developing all domestic energy sources.
Obama used the speech to revive his call to rewrite the tax code to adopt the so-called "Buffett rule," named after the billionaire Warren Buffett, who says it is unfair that he pays a lower tax rate than his secretary.
Those making more than $1 million a year would pay an effective tax rate of at least 30 percent and their tax deductions would be eliminated.
To underscore his point, Buffett's secretary, Debbie Bosanek, was seated in the first lady's box in the House of Representatives for Obama's address.
As the president walked to the podium to give his speech he was overheard congratulating Defense Secretary Leon Panetta. "Good job tonight. Good job tonight."
Only later was it learned Obama was apparently referring to the rescue by the U.S. military of an American and a Dane being held hostage by pirates in Somalia. The operation was not made public until after the speech.
Obama will shift into full campaign mode on a three-day tour starting on Wednesday to Iowa, Arizona, Nevada, Colorado and Michigan, all election battleground states.
In his speech, Obama also rolled out proposed corporate tax reforms, including a minimum rate on companies' overseas profits and a tax credit for moving jobs back home.
Taking aim at China - an election-year target of Republicans and Democrats alike over its currency and trade practices - Obama proposed creation of a new trade enforcement unit within the federal government.
Promising what amounts to a peace dividend, Obama also proposed using half of the "savings" from ending the war in Iraq and winding down in Afghanistan to pay down U.S. debt, with the other half going to fixing decaying roads and railways.
Addressing the housing crisis, Obama said he would send to Congress a proposal to allow more Americans to take out new and cheaper mortgages as long as they are current on their payments, savings that would amount to $3,000 per household each year. The depressed housing market continues to drag on the economy.
(Additional reporting by Laura MacInnis, Alister Bull, Samson Reiny, Margaret Chadbourn, Editing by Ross Colvin and Eric Beech)
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