Caught up in a tax revolt

The withdrawal of Tom Daschle’s nomination Tuesday as secretary of Health and Human Services reflected White House recognition that his tax problems were igniting anger over an apparent double standard: that Washington insiders could be careless about their taxes while ordinary Americans had to sacrifice.

As late as Monday night, the former Senate Democratic leader thought he could survive the disclosure that he only recently paid about $140,000 in back taxes. But by Tuesday morning, the mood had changed.

Coming after Treasury Secretary Timothy F. Geithner’s admitted failure to meet his own tax obligations, Democratic senators and administration allies began expressing concern to the White House about Daschle’s ability to weather the criticism and remain an effective leader on healthcare reform.

The concern was all the greater because Nancy Killefer, who was to head President Obama’s new office devoted to improving government performance, acknowledged that she had not paid employment taxes for a household employee and withdrew her appointment.

The groundswell had been building outside Washington for days. Late last week, bloggers sympathetic to Obama began criticizing Daschle on the back taxes, as well as on his ties to the pharmaceutical industry and others with stakes in healthcare legislation.

Obama, seeking to turn attention back to his economic stimulus plan, moved quickly Tuesday to take responsibility for the Daschle imbroglio.

“I’ve got to own up to my mistake, which is that ultimately it’s important for this administration to send a message that there aren’t two sets of rules. You know, one for prominent people and one for ordinary folks who have to pay their taxes,” Obama said in an interview on NBC News.

“And so I’m frustrated with myself, with our team. . . . And I’m here on television saying I screwed up, and . . . part of the era of responsibility is not never making mistakes, it’s owning up to them and trying to make sure you never repeat them, and that’s what we intend to do.”

Obama had entrusted Daschle with his most ambitious domestic priority: reducing the cost and expanding the scope of healthcare coverage.

Even before Obama was sworn in, Daschle was traveling around the country to build support for the incoming president’s plans.

In a statement released by the White House on Tuesday, Daschle said that “if 30 years of exposure to the challenges inherent in our system has taught me anything, it has taught me that this work will require a leader who can operate with the full faith of Congress and the American people, and without distraction.”

“Right now, I am not that leader, and will not be a distraction,” he said.

Daschle’s withdrawal is unlikely to derail a healthcare reform movement that started gathering steam before Obama was elected.

“If anything, there’s more urgency for us to keep up the momentum,” said Senate Finance Committee Chairman Max Baucus (D-Mont.), one of the leading architects of planned health reform.

Skyrocketing healthcare costs, the growing ranks of the uninsured and increasing concern among business organizations about the cost of offering medical benefits have been driving groups long at odds into more cooperative positions.

And on Capitol Hill, senior lawmakers have been moving ahead with plans for legislation that would advance many of the goals Obama and Daschle had talked about.

But completing that process will probably be harder without Daschle, who was popular with lawmakers on both sides of the aisle and was seen as a consensus builder who could help shape the kind of grand compromise many think will be necessary.

The soft-spoken South Dakota Democrat served 10 years as the party’s leader in the Senate during a 26-year legislative career.

After leaving Congress, he became a champion of healthcare reform while building relationships with interest groups crucial to the debate.

Now Obama will have to find a new person to carry forward his most ambitious policy agenda. The selection process will probably take time, White House officials said, especially given the necessity for close examination of candidates’ backgrounds.

Few of the people mentioned as possible replacements for Daschle would bring his level of experience on Capitol Hill.

A number of candidates -- including Kansas Gov. Kathleen Sebelius, who is widely respected for her work on healthcare -- have never served in Washington.

Inexperience was considered a major handicap for the Clinton administration, which was full of Washington outsiders who proved unable to thread the White House’s healthcare plans through the capital’s political culture.

Obama acknowledged his challenge in an interview with ABC News.

“Tom Daschle would have been the best person to help shepherd . . . a healthcare bill through a very difficult process in Congress,” he said.

Nonetheless, many lawmakers said they had no plans to slow down.

“Healthcare will stay on the top of the agenda because the American people want it and the president has said he will do it,” said Rep. Henry A. Waxman (D-Beverly Hills), who is expected to play a key role in shaping the legislation as chairman of the House Energy and Commerce Committee. “The rest of us just will have to work harder.”

John Castellani, who heads the influential Business Roundtable, said his group over the last month had been working more closely with members of Congress than with the new administration.

That effort builds on the emerging consensus that the federal government must act decisively to help cover the roughly 46 million people in America who lack health insurance.

If both Daschle and Killefer had been confirmed, they would have been the second and third Obama officials allowed to serve despite having owed back taxes -- making it hard for Obama to insist he was imposing the strictest ethical standards.

So in the morning, news broke that Killefer had withdrawn. Daschle pulled out shortly afterward.

Last month, Daschle paid more than $140,000 in back taxes and interest stemming from his failure to report as income the use of a car and driver provided by InterMedia Advisors, a New York private equity fund that Daschle has worked for since he left the Senate in 2005.

Geithner was confirmed despite nagging concerns that the man who would oversee the Internal Revenue Service had failed to pay $34,000 in payroll taxes.

In Killefer’s case, she had been hit with a $947 tax lien from the District of Columbia in 2005 over back taxes on a household employee.

Although Daschle and top administration officials thought Monday night that he could survive the uproar and win Senate confirmation, other Washington veterans saw trouble.

“It became clear over the weekend that this was going to be a dragged-out issue,” said Stanley Brand, a Washington lawyer who specializes in ethics cases involving legislative and executive branch officials.

And Republican senators announced they had more questions about Daschle.

Obama spokesman Robert Gibbs, briefing reporters Tuesday, denied that the president had asked Daschle to step aside. “As Sen. Daschle said in the statement that we released and told the president on the phone, he did not want to be a distraction to [Obama’s] agenda.”

At least one public health advocate expressed relief that Daschle had quit, not because of his tax problems but because of a fear that the wealth he had obtained, at least indirectly, from healthcare corporations would compromise his ability to lead.

Dr. Marcia Angell, former editor in chief of the New England Journal of Medicine, said Tuesday that she was pleased with Daschle’s decision.

“I was much more concerned about his history of working on behalf of the private health insurance industry than I was about his tax issues,” said Angell, who teaches at Harvard Medical School. As “head of the Obama health system reform effort, he would inevitably have had to make decisions that greatly affected his former clients.”

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peter.nicholas@latimes.com

tom.hamburger@latimes.com

Times researcher Janet Lundblad in Los Angeles contributed to this report.