Feb. 4 (Bloomberg) -- President Barack Obama, who has wavered on his pledge to block lobbyists from working in his administration, is finding his Cabinet nominees’ violations of tax laws more difficult to overlook.

The withdrawals yesterday of former Senate Majority Leader Tom Daschle to be Health and Human Services Secretary and Nancy Killefer to be his chief oversight officer, were Obama’s biggest setbacks as president. In both cases, the nominations were scuttled after the candidates admitted tax mistakes.

“Did I screw up in this situation? Absolutely,” Obama, 47, said of Daschle’s withdrawal in an interview on NBC yesterday.

The failed nominations, while “an embarrassment,” shouldn’t detract from his agenda, he said.

The incidents follow the Senate confirmation of Treasury Secretary Timothy Geithner last week by the closest margin since World War II because of his failure to pay almost $50,000 in taxes.

The nominees’ tax gaffes are an added hurdle for the Obama administration’s pledge to clean up Washington and reclaim it from lobbyists. That commitment already has been tested by his nomination of William Lynn, a former top lobbyist for defense contractor Raytheon Co., to be deputy defense secretary.

Lobbyist Waiver

“They’ve gotten around the ‘no lobbyists’ rule by issuing waivers; they can’t do that for nominees with tax problems,” said former California Republican Representative Bill Thomas, who was chairman of the tax-writing House Ways and Means Committee from 2001 to 2006.

“Geithner got through in part because he was the first,” Thomas said. “They can’t give a pass to anyone else because it would establish a behavior pattern they can’t condone.”

The last time high-profile Cabinet officers were derailed for tax reasons was in 1993 when two of then-President Bill Clinton’s picks for attorney general were forced to withdraw their nominations for glitches with their household help.

“I’m not sure we’ve ever seen anything like this,” said former Texas Republican Representative Bill Archer, who was Thomas’s predecessor as head of the Ways and Means Committee from 1995 to 2000. “The more that emerges, the more difficult it becomes” for the new administration.

Still, some political analysts said the nomination failures wouldn’t have lasting consequences.

‘Overall Impact’

“I don’t think you can realistically judge the overall impact of the path that President Obama has set out on to change Washington by what is happening in the first couple of weeks,” said Fred Wertheimer, the president of the Washington- based advocacy group Democracy 21.

He said the incidents sent the message “that there are higher standards as far as President Obama is concerned and people who want to continue playing by Washington rules are going to run into those standards.”

The nominees’ tax mistakes are unrelated and, in some cases, quite common.

Geithner underpaid his Social Security and Medicare taxes for several years earlier this decade when he was employed by the International Monetary Fund, which doesn’t automatically remit those levies to the Internal Revenue Service. In 2006, the federal tax-collection agency estimated that as many as half of all U.S. employees at organizations like the IMF made similar mistakes.

IRS Penalties

With the interest penalties, Geithner paid the IRS $48,268 and owed a smaller amount for other minor mistakes on his tax return, the Senate Finance Committee reported.

Daschle, 61, told the Finance Committee this week that he failed to pay more than $120,000 in taxes on the value of a car and driver he was provided for three years by Leo Hindery Jr., a Democratic benefactor who owns the private-equity firm InterMedia Advisors. Determining the value of perks, especially the use of corporate jets for private reasons, has long vexed corporate executives and their employers.

Killefer, 55, slated to be chief budget director in charge of overseeing government spending for the administration, cited a $947 bill for failing to pay District of Columbia unemployment tax in 2005. The city placed a lien on her home for the unpaid tax that year.

“It’s more common that someone making six, seven figures to have a few hiccups with the IRS than people know,” said Richard Boggs, chief executive of Nationwide Tax Relief, a Los Angeles firm that helps delinquent taxpayers resolve tax issues.

Questions Weren’t Asked

Former IRS Commissioner Margaret Milner Richardson said the tax problems indicate the people in charge of vetting nominees weren’t asking the right questions.

“It would be very interesting to know what questions were asked and what answers were given,” said Richardson, who advised the Obama campaign. “They didn’t get the right answers.”

Daschle’s nomination is part of “an unfortunate trend” that indicates “some serious problems with the vetting process,” Texas Republican Senator John Cornyn said in an interview Feb. 2.

“As an isolated event” Daschle’s tax troubles don’t undermine the credibility of Obama’s pledge to bring transparency and change to Washington, Cornyn said. Still, “when you start connecting them together it creates a kind of narrative that isn’t helpful to him,” he said.

Taxes Not Only Problem

Stephen Hess, a presidential historian at George Washington University, said that in Daschle’s case especially, admitting a tax problem after Geithner had been approved by such a narrow margin was just part of the problem.

“It’s not just the taxes as the trigger for all of this, it’s what it symbolically represented,” Hess said. “It starts to look Wall Street-esque.”

What comes into play, he said, is the “greed factor” because the problems “had to do with a car and driver, with a man who made $5 million very quickly.”

Archer said the string of nominees with tax mistakes has larger implications for the integrity of the tax system.

“The thing that concerns me is it sends a signal to the American taxpayer that maybe I shouldn’t be so conscientious about paying my taxes,” he said.

Thomas said both Daschle and Geithner, 47, initially excused their mistakes in part by blaming their accountants for the gaffes.

“Apparently, there’s no substitute for doing your own returns,” he said.

To contact the reporters on this story: Ryan Donmoyer in Washington at rdonmoyer@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

Last Updated: February 4, 2009 00:01 EST