DEFINITION of 'Tax Anticipation Note - TAN'

A Tax Anticipation Note (TAN) is a short-term debt security issued by a municipal government to finance an immediate project that will be repaid with future tax collections. State and local governments use tax anticipation notes to borrow money, typically for one year or less and at a low interest rate, in order to finance a capital expenditure such as the construction of a road or repairs of a building.

BREAKING DOWN 'Tax Anticipation Note - TAN'

A note is a debt instrument issued by a borrowing entity to raise funds in the short-term. Notes are interest-bearing securities, promising periodic interest payments to lenders for the duration of the bond’s life and a principal repayment at the end of the security’s term life. These payments are usually made from a defined revenue source. Notes usually mature in one year or less, although notes of longer maturities are also issued. One form of a note that is issued by a governmental body to fund its short-term need is a tax anticipation note.

A Tax Anticipation Note (TAN) is a type of municipal bond issued to finance a current operation or project before the issuer receives tax revenues. In effect, the issuing government uses the following year's tax revenue to repay the TANs. The government does not have to wait to have cash in hand before embarking on a capital project as it could issue these short-term notes in the interim. The interest income earned from TANs is generally tax exempt for investors on a state and federal level. Due to this tax exemption, tax anticipation notes carry relatively low interest rates.

For example, assume the government would like the development of a public park to start in June 2017. The total budget for financing this endeavor is $5 million, however the city can only afford to pay $2 million currently. In anticipation of the tax revenues that will be received in April 2018 after the deadline for filing taxes, the city may issue tax anticipation notes with a face value of $3 million to mature in May 2018. After it collects taxes from individuals and businesses, the city would retire the TANs and repay any other expenses associated with building the park.

Tax anticipation note financing helps governments smooth out the ups and downs in their revenue cycles, if the timing of their receipts does not match the timing of their expenditures. The maturity dates on the notes are fixed and cannot be altered. In addition, the proceeds received form the notes cannot be diverted for other projects or expenses other than the one stated in the indenture. Also, the revenue received from taxes must be used to first repay the TAN holders, before any excess can be used for other projects. For example, the indenture may state that the security of an issued note is based on the income tax proceeds they expect to get in 10 months.

TANs are one of several types of anticipation note that state and local governments can use to fund a short-term need; others include Revenue Anticipation Notes (RANs) and Bond Anticipation Notes (BANs).

  1. Municipal Note

    A municipal note is debt issued by state and local governments ...
  2. Construction Loan Note - CLN

    A short-term obligation in the form of a note, used for the funding ...
  3. Debt Issue

    A debt issue is a financial obligation that allows the issuer ...
  4. Project Notes

    A short-term debt obligation issued to finance a project or endeavor ...
  5. Taxes

    An involuntary fee levied on corporations or individuals that ...
  6. Revenue Anticipation Note - RAN

    A municipal bond that is repaid with expected revenues from the ...
Related Articles
  1. Investing

    Municipal bond tips for the Series 7 exam

    Learn to distinguish between general obligation and revenue bonds to ace the municipal bonds portion of the Series 7 exam.
  2. Taxes

    10 States With High Sales Taxes

    Most states have sales taxes of some kind for goods and services. Here's a rundown of the states that have the highest sales taxes.
  3. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  4. Insights

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  5. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  6. Investing

    Explaining Government Bonds

    A government bond is a debt security a government issues.
  7. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
  8. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  9. Taxes

    States That Pay The Most Taxes

    These five states may pay through the nose in taxes - but the benefits may just be worth it.
  10. Taxes

    Could The Fair Tax Movement Ever Replace The IRS?

    Although many taxpayers would love to see the IRS abolished, only a handful of thinkers have come up with any sort of viable replacement plan. The Fair Tax is one such idea that has continued ...
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  2. Where can I buy government bonds?

    The type of bond dictates its purchase. Federal bonds are issued by the federal government, while municipal bonds are issued ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center