SACRAMENTO (Bloomberg) — California Governor Arnold Schwarzenegger proposed making health insurance mandatory and assessing fees on business to expand the state-run medical system to more children and workers without medical benefits.Schwarzenegger, a Republican who has been a frequent foe of tax increases, proposed that businesses with 10 or more workers be required to provide health insurance or pay a four percent payroll tax to the state, the most populous in the US. All Californians would be required to carry the insurance or face withholding of their tax refunds or garnishment of wages.

Schwarzenegger said all parties would ultimately come out ahead, even with the fees. "When you look at the math, they are actually are going to benefit more than what is being taken away," he said on a teleconference with reporters in Sacramento. "Everyone ends up with a better deal."

Schwarzenegger's health insurance proposal is his first initiative since being sworn in for a second term last week. Other states from Washington to New York are looking for ways to expand health care to some of the 47 million in the US that don't have insurance.

The proposal is similar to that approved by Massachusetts last year, which became the first state in the US to make health insurance mandatory while establishing subsidies to help cover the cost.

Under Schwarzenegger's plan, all children whose families earn up to three times the federal poverty level will be eligible for care in California's state-run system, as would adults at or below the poverty line.

Some 1.2 million Californians could buy insurance through a state-run pool, which would be subsidised by fees levied on businesses that don't provide health benefits. Some 1.1 million high-income workers would by law have to carry health coverage.

California in 2003 adopted a law that would have required all but the smallest employers to provide their workers with health insurance benefits, only to have it overturned in a referendum the following year as businesses argued it would deal a blow to the economy. Schwarzenegger, an avowed foe of raising taxes, backed overturning that law.

There are some 6.5 million in California without health insurance. Under the current system, the public bears the cost of the uninsured, with the governor's office called a hidden tax of $1,186 a year on every family.

The cost of providing health care for employees has risen at more than twice the rate of inflation for the past decade, statistics from the Kaiser Foundation show. The rising expense has led many companies to scale back coverage for workers, according to the Economic Policy Institute in Washington.

Faced with that, a number of states have considered laws to expand health care benefits. Maryland last January became the first US state to legally require large companies of more than 10,000 workers to pay a set amount of money for employee health- care benefits, though it has since been fought in the courts.