VANCOUVER - British Columbia is harmonizing its seven per cent provincial sales tax with the federal GST to create a single 12 per cent tax starting in mid-2010.

The move will increase the cost of services of everything from haircuts to carpet cleaning that today include only the five per cent GST.

However, the province says a new one-tax system will cut costs for businesses and those savings will then be passed on to consumers.

The change, which takes effect July 1, 2010, will also increase competitiveness and boost investment in B.C., the government said.

"This is the single-biggest thing we can do to improve B.C.'s economy," said Premier Gordon Campbell.

B.C. is one of the last few provinces to implement the harmonized tax, known as the HST.

Ontario announced plans in March to harmonize its eight per cent provincial sales tax with the GST for a 13 per cent tax. The change also begins on Canada Day next year.

Finance Minister Colin Hansen said B.C. began working on the move in May, after his Liberal party's re-election.

"Ontario had a head start on this and we felt it was important for B.C. not to lose a competitive advantage," he said in an interview, noting that B.C. will have the lowest harmonized tax in Canada.

Only Manitoba, Saskatchewan and Prince Edward Island have yet to announce such a change. Alberta doesn't have a provincial sales tax.

Quebec, Nova Scotia, New Brunswick and Newfoundland and Labrador harmonized their sales taxes with the GST more than 10 years ago, a decision that became politically unpopular when consumers ended up paying more for goods that were previously exempt from the provincial tax.

Hansen acknowledged the prices of some services could go up in the near term.

"Consumers will perceive there to be an increase in the cost of some things," he said.

However, Hansen said the provincial tax is often imbedded in goods even though consumers can't see it on the sticker price.

He believes the cost savings businesses will see from a harmonized tax will be passed on to consumers as lower prices.

The combined tax will include exemptions, similar to the provincial tax, on items such as gas and diesel fuel, books, children's clothing and shoes, children's car seats, diapers and feminine hygiene products.

There will also be a partial rebate of the provincial portion of the single sales tax for new housing. Houses that cost under $400,000 will not pay more tax under the new system, while those that cost more will receive a flat rebate of about $20,000.

These are similar to exemptions proposed in Ontario, except for gasoline. Hansen said gas and diesel was included as an exemption because B.C. already has a carbon tax on fuel.

Exemptions will come as point-of-sale rebates, he said.

NDP finance critic Bruce Ralston isn't convinced the savings for businesses will necessarily be passed on to consumers.

"Economic theory says yes .. but that doesn't mean it happens in the real world," he said.

"The biggest concern I have is that, just at a time when we are trying to come out of a recession, is this the right time to make people pay more tax for ordinary services people buy as part of their daily lives?"

Maureen Bader, the B.C. spokeswoman for the Canadian Taxpayers Federation, said the move was a surprise given the government's opposition to such a tax in the past.

"In theory, it's a good thing. In the short term it's bad for families, but over the long run it should help with economic growth and increase incentives to work and invest in the province," she said.

The Business Council of B.C. applauded the tax marriage, saying the current system is outdated, inefficient and imposes heavy compliance burdens on B.C. businesses.

"Today's announcement represents a bold move," said Jock Finlayson, the council's executive vice-president.

"A harmonized sales tax regime will stimulate investment, bolster B.C.'s competitive position, and raise productivity -- thus leading, over time, to higher real wages and incomes."

Canadian Manufacturers & Exporters (CME) said the new tax system will help make B.C. exports more competitive in global markets.

"The Olympics will put B.C. on the global podium next February and this sends a clear message that B.C. means business," said Craig Williams, vice president of CME British Columbia.

While consumers will notice the HST's impact on July 1 next year, the CME said businesses may not notice the full impact until 2018.

Shawn Hall, a spokesman for Telus Corp., Canada's second largest telecommunications company, said consumers now pay GST on basic telephone and TV service, which means their bills will rise when the new harmonized tax takes effect.

However, he said the money the company saves on lower costs to process taxes with the new system will translate into lower prices for customers in the longer term.

"Overall the economy should benefit and overall prices should come down," Hall said, adding his company supports the province's decision.

The province estimates the decision will remove over $2 billion in costs from B.C. businesses, including about $880 million for the construction industry, $$210 million for the transportation industry, 140 million for each manufacturing and forestry and $80 million for mining and oil and gas.

TD Bank economist Pascal Gauthier said studies show a harmonized tax does create lower prices for consumers down the road.

"They wont be penalized," he said.

Gauthier also said that provinces yet to harmonize their tax systems will feel the pressure now that it's being done by the two biggest provinces of Ontario and B.C.

The federal government will provide British Columbia with $1.6 billion in transitional funding.

Ottawa will also pay for the full cost of administration, saving the province about $30 million annually in administration costs.

Ontario will receive about $4.3 billion over two years to help with its tax harmonization plans. The province is also offering tax breaks, including $1,000 cheques for a family earning under $160,000.

Single people making less than $80,000 will receive $300.