Obama hit by withdrawal of health nominee Daschle

*Daschle withdraws after tax flap

*Second nominee also felled by tax questions

*White House says healthcare reform will proceed

WASHINGTON, Feb 3 (Reuters) - Barack Obama's choice to spearhead U.S. healthcare reform stepped down in a flap over personal taxes on Tuesday, an embarrassing blow that distracted from the president's push for a nearly $900 billion economic stimulus plan.

Tom Daschle, a former Democratic leader in the Senate and a key Obama adviser who was his pick for health secretary, abruptly withdrew after a storm over late tax payments that had raised questions over Obama's pledge to bring high ethical standards to the White House.

Daschle said he did not want to become a "distraction" after errors forced him to pay $140,000 in back taxes. Obama said in a statement that he accepted the decision "with sadness and regret."

The White House said Daschle's withdrawal did not mean Obama's healthcare plans were in trouble.

"The issue of affordable healthcare ... is bigger than one person," said White House spokesman Robert Gibbs. "I don't think the effort slows down for health care reform."

Daschle's withdrawal came shortly after Obama's nominee to become the first U.S. "chief performance officer" also dropped out because of tax questions.

Nancy Killefer, Obama's choice to oversee budget and spending reform, said she did not want her problems to create "distraction and delay." [ID:nWAT010894]

She was the third Obama nominee to have tax problems, following Daschle and Treasury Secretary Timothy Geithner, who was approved after facing questions about his taxes.


The staff issues put Obama, who is just two weeks into his presidency, on the defensive. On Monday, Obama said he "absolutely" backed Daschle.

Obama, a Democrat, succeeded Republican George W. Bush on Jan. 20 after an election campaign in which he pledged to bring high ethical standards and change to Washington's political style.

On Tuesday Obama had wanted to advance his theme of being able to work across party lines by naming a third Republican to his cabinet -- for the post of commerce secretary -- and scheduled television interviews to push his economic agenda.

He is trying to push through a nearly $900 billion stimulus package to revive a sagging economy.

Although he got the backing of Obama and colleagues in the Democratic-controlled Senate on Monday, Daschle was hammered in newspaper editorial pages on Tuesday. Daschle has also faced questions over his earnings since he left the Senate.

"Surely President Obama can find qualified people to serve in his cabinet who aren't hustling to write overdue checks to the IRS," the Philadelphia Inquirer said. "Daschle's error is too serious to ignore; it should disqualify him from serving in the cabinet."

Some of Daschle's Senate colleagues were caught off guard by his decision but said it would not have a longterm impact on healthcare reform efforts.

"It doesn't change the imperative of healthcare reform, it doesn't change the president's fundamental approach, and it doesn't change the president's ability to find somebody with enormous talent to get this job done," Massachusetts Senator John Kerry told reporters.


The recurring tax embarrassments threatened to grab the spotlight as Obama pushes for rapid passage of an economic stimulus bill aimed at pulling the U.S. economy out of its worst crisis in decades.

The Senate was debating the stimulus proposal on Tuesday, but Republicans are putting up increasing resistance to Democratic proposals they say favor government spending over tax cuts to revive the economy.[ID:nN03512070]

Obama on Tuesday nominated Senator Judd Gregg as commerce secretary, the third prominent Republican in his Cabinet, but avoided shouted questions about Killefer's withdrawal from her nomination. [ID:nN03525325]

Gregg, 61, is the top Republican on the Senate Budget Committee. He could play a key role in selling Obama's stimulus package to skeptical members of his party.

"Judd is a master of reaching across the aisle to get things done," Obama said at a White House ceremony.

Gregg's nomination followed an earlier embarassment for Obama.

He was named after New Mexico Gov. Bill Richardson, Obama's first choice for commerce secretary, withdrew in the face of a legal inquiry into a company that did business with the New Mexico state government. Richardson denied any wrongdoing.

Additional reporting by Ross Colvin, Jeff Mason, Matt Spetalnick and Tom Ferraro, Editing by Frances Kerry