TORONTO - Buying a morning coffee or a newspaper won't cost an extra eight per cent when Ontario merges its provincial sales tax with the federal GST next July, Finance Minister Dwight Duncan announced Thursday.

Printed newspapers and certain prepared foods and beverages sold for less than $4 have been added to a list of exemptions from tax harmonization, Duncan said.

"But it's important for Ontarians to know that today's announcement is about far more than not raising coffee prices," he said at a Tim Hortons outlet in west Toronto.

"It's part of a much larger, comprehensive tax package that will create jobs."

Books, children's clothing and footwear, diapers, car and booster seats and feminine hygiene products will also be exempt from Ontario's eight per cent portion of the blended sales tax when it takes effect next July.

By keeping newspapers and cheap food and drinks off the list, the government is giving up $325 million a year that it otherwise would have collected as revenue, Duncan said.

Ontario is getting $4.3 billion over two years from Ottawa to move ahead with tax harmonization under a deal signed last March. British Columbia plans to join Ontario in bringing in a blended tax in July.

The federal Conservatives provided Ontario with "considerable flexibility" in implementing the blended tax -- something that wasn't extended to the Atlantic provinces when they harmonized in the 1990s under the federal Liberals, Duncan said.

That flexibility, which allowed Ontario to add other exemptions, seems to be open to other provinces like B.C., he added.

"I do know that they're going through a similar exercise to Ontario with respect to the agreement they reached with the federal government and with respect to exemptions," Duncan said.

No other exemptions -- including gasoline or home heating fuel -- are being considered by the Ontario government, which will table its HST-enabling legislation on Monday, Duncan said.

Other groups, such those lobbying for an HST break on gasoline or mutual funds, are out of luck, he added.

"Why did we do it? Because we've already been exempting this," Duncan said. "The exemption has been in place since the sales tax was created in 1961. From our perspective, it made sense just to keep the exemption moving forward."

The tax pass on java and donuts didn't impress Nancy Sidle, 67, who was sipping a mug of black coffee with a friend at a nearby table.

The HST will add $500 a year to her condo fees when it takes effect, she said.

"To say that people are upset would be a masterpiece of understatement," Sidle added.

Opposition parties have labelled harmonization a massive tax grab because it will increase the cost of many items, such as gas and home heating fuel, that were previously exempt from the provincial levy.

Premier Dalton McGuinty's about-face on taxing fast food and coffee is proof that he's worried about public anger over the HST, said Progressive Conservative Peter Shurman.

"What we've now seen is that McGuinty is disengenuous in saying that things have to be applied across the board," he said.

"If he caved on this, he'll cave on other things."

Shurman accused McGuinty of bowing to the "deep pockets" of the food industry, rather than Ontario families who will have to pay more for heating fuel and electricity.

The McGuinty government is leaning on a report by tax expert Jack Mintz in selling the blended tax. The report said tax harmonization combined with corporate and income tax cuts will help create an estimated 591,000 new jobs in the province over 10 years.

Erin Weir, an economist with the United Steelworkers union, called the job figure "pretty dubious," saying it's based on unsupported assumptions.

According to a September report by TD Bank, harmonization will result in an immediate and permanent increase in costs for consumers in Ontario and B.C.

The report estimates that tax harmonization will save companies about $6.9 billion. Some of the savings will be pushed through to consumers but not enough to completely offset the rise in consumer prices.

Economists Don Drummond and Diana Petramala said the measure is welcome, however, because harmonization is a more efficient manner of collecting taxes and will increase competitiveness in the two provinces.

Ontario is trying to soften the blow to consumers by offering some income tax relief and three cheques totalling up to $1,000 for families and $300 for individuals.

It's the second time the Ontario government has climbed down from its tax harmonization plans. In June, it promised rebates of up to $24,000 for all new-home buyers, even if they purchase a multimillion-dollar mansion.

Originally, the rebates first announced in the March budget were to apply only to new homes costing $400,000 or less. They were intended to offset the new 13 per cent harmonized tax on new homes, which are currently exempt from the eight per cent PST.

However, all new-home buyers will qualify for the PST rebate on the first $400,000 of the purchase price, regardless of the final cost. The change is expected to cost the province about $250 million a year in lost revenue.

Nova Scotia, New Brunswick and Newfoundland and Labrador harmonized their sales taxes with the federal GST more than 10 years ago.

Quebec partially harmonized its sales tax system and Alberta has no provincial tax, leaving Saskatchewan, Manitoba and Prince Edward Island as the remaining holdout provinces.