Daschle Withdraws Nomination Following Tax Questions

By Kristin Jensen and Edwin Chen

Feb. 3 (Bloomberg) -- Former Senator Tom Daschle withdrew as nominee for secretary of health and human services after questions arose about errors on his federal taxes.

Hours earlier, another of President Barack Obama’s nominees, Nancy Killefer, withdrew from consideration as deputy director of the White House Office of Management and Budget. She also cited a personal “tax issue.”

The twin withdrawals in rapid succession dealt Obama his worst setback as president, threatening to delay his efforts to enact comprehensive health care overhaul and inject greater accountability into his administration.

Fixing the nation’s health system “will require a leader who can operate with the full faith of Congress and the American people and without distraction,” Daschle, 61, said in a statement today. “Right now, I am not that leader.”

Obama said in a statement that he accepted Daschle’s decision with “sadness and regret.” In a series of previously scheduled interviews with television networks later in the day, Obama took responsibility for the demise of the nomination.

“Did I screw up in this situation? Absolutely,” Obama told NBC. “I’m willing to take my lumps.”

He said the episode, while “an embarrassment,” should not detract from his agenda.

Amended Returns

Daschle’s nomination faced delays after he amended three years of returns on Jan. 2 for unreported income, including personal use of a car and driver provided by Leo Hindery Jr., founder of the private-equity firm InterMedia Advisors. Daschle, who sat on the firm’s board, paid $140,000 in back taxes and interest.

Killefer was to oversee White House efforts to make government more accountable for its spending.

In her letter to Obama, Killefer, 55, said she came “to realize in the current environment that my personal tax issue of D.C. unemployment tax could be used to create exactly the kind of distraction and delay those duties must avoid.”

Daschle’s withdrawal stunned his former colleagues in the Senate, many of whom had defended him.

“It’s regrettable,” said Senate Finance Committee Chairman Max Baucus, a Montana Democrat. “I thought he was going to get confirmed.” Daschle also was to have held a senior post within the White House.

Daschle “did the honorable thing to spare his family, the president and his colleagues in the Senate from a tough political battle,” Illinois Senator Dick Durbin, the Senate’s No. 2 Democrat, said.

Health Care Role

The withdrawal “really sets us back a step” in the drive to overhaul the health-care system because “there are very few people who could have stepped into the role he was going to play,” Durbin said.

Daschle’s tax errors are part of “an unfortunate trend here” that shows “some serious problems with the vetting process” in the Obama administration, Republican Senator John Cornyn of Texas said in an interview yesterday.

Like Daschle and Killefer, Treasury Secretary Timothy Geithner also faced questions about back taxes he had to pay. He was confirmed Jan. 26.

Today’s events are all the more reason for Obama to push his economic stimulus bill through Congress quickly and chalk up a big win as quickly as possible, said analyst Paul Begala, a onetime top adviser to President Bill Clinton.

“It all depends on passing a successful economic plan,” he said. “The country believes in this new president and wants him to succeed.”

Economy Is Key

“This is somewhere between a huge embarrassment and, at least temporarily, debilitating,” said Washington-based political analyst Stuart Rothenberg. “But if a year from now the economy is coming back and the U.S. looks strong, and our international reputation is up, nobody is going to worry about this other stuff.”

Three of Obama’s nominees now have withdrawn before going through the confirmation process. Obama’s first pick to lead the department, New Mexico Governor Bill Richardson, withdrew last month amid a federal investigation into the state’s government.

In seeking replacements for Daschle and Killefer, the Obama White House now must adhere to “zero-tolerance for vetting problems,” and Obama must pick “ivory snow” nominees with spotless records, said Charlie Cook, publisher of the Cook Political Report.

Obama Pledge

That job is no mean feat in part because of Obama’s own campaign pledge to limit the role of lobbyists in his administration, as well as to instill a new era of personal responsibility and government accountability.

“Obama set incredibly high standards” that may continue to “expose him to suggestions of hypocrisy,” Cook said.

Still awaiting confirmation are William Lynn, Obama’s nominee to be deputy defense secretary, and William Corr, the president’s pick as the next deputy secretary of health and human services.

Lynn, 55, is senior vice president in Raytheon’s Washington office and oversees government lobbying for what is the nation’s fourth-largest defense contractor. He was a registered lobbyist until March 2008.

Critics said Corr, executive director of the nonprofit advocacy group Campaign for Tobacco-Free Kids, acted as a lobbyist. A campaign spokesman, Joel Spivak, said Corr “was not ever a fulltime lobbyist.”

“Obama came in with such high expectations and lofty rhetoric,” said Rothenberg. “Now he’s encountering the difficulties of governing.”

Vetting Process

The Daschle and Killefer incidents suggested less-than- rigorous background checks on potential jobholders.

“The question is whether this somehow uncovers some weaknesses in the early days of the administration that will show up later,” Rothenberg said.

At the White House, press secretary Robert Gibbs said Obama retains confidence in the vetting process.

“The president has confidence in the processing,” Gibbs said. “The bar we’ve set is higher” than any past administration, he said, adding that it would take more than two weeks for the president to make good on his pledge to bring change to Washington.

“Thankfully, we’ve got four years to try,” Gibbs said.

The biggest casualty, several analysts said, may be Obama’s aspirations to overhaul the U.S. health care system.

“Having such a high powered, well-wired guy as Daschle as the quarterback on health care was going to be huge,” Cook said.

“I’m sure they’ll get somebody that’s quite competent. But they’re not going to be able to step in the same way that Tom Daschle did,” he said. “So of course it’s a setback.”

To contact the reporters on this story: Kristin Jensen in Washington at kjensen@bloomberg.net; Edwin Chen in Washington at Echen32@bloomberg.net