Original sentence: State and local governments would have to offer higher interest returns to attract investors.States and municipalities would see their cost of debt increase- currently, the federal income tax system provides tax advantages to state and local government bonds.The FairTax plan squashes the incentive for private investors to purchase tax-free bonds.The change would also disincentivize home ownership, as the elimination of the mortgage interest tax credit will make loans significantly more expensive in direct terms.This "tax discount" allows state and local governments to issue debt at low yields, which reduces their interest costs
Edited sentence: Corporate debt instruments would no longer need to offer the tax premium to offset the income taxes the recipients would owe.Hence reducing the mortgage rate by 25% of the rate -- ie, a 6% APR becomes 4.5%.Since this creates much less risk than Corporate bonds, State and local debt costs would remain low.So Corporate bond rates will fall to the equivalent tax-free rates.State and local governments would still have the advantage of their outstanding credit ratings as taxing authorities.States and municipalities would see their cost of debt compete with other investment returns - currently, the federal income tax system provides tax advantages to state and local government bonds.The FairTax plan removes the incentive resulting from this tax difference.The change would also disincentivize home ownership, as the elimination of the mortgage interest tax deduction will make loans significantly more expensive in direct terms.This "tax discount" allows State and local governments to issue debt at lower yields than taxable bonds, which reduces their interest costs.This would be the result of lenders no longer paying income taxes on profits, higher savings increasing the money supply, and reduced lender costs on interest paid to savings accounts.This would become the only way to attract investors