Tax Anticipation Note (TAN): Definition and Purpose


Key Takeaway:

  • A Tax Anticipation Note (TAN) is a type of short-term municipal bond that is issued by a local government to finance current operating expenses while awaiting future tax revenues.
  • TANs are issued at a discount, which means the bondholder pays less than the full face value of the note. The difference between the discounted price and the full face value is the interest earned by the bondholder.
  • The purpose of TANs is to provide funding for immediate cash flow needs for municipalities, enabling them to finance essential services and projects until tax revenues are received. However, TANs carry risks, including the possibility of default and a lack of diversification.

Are you confused about what a Tax Anticipation Note (TAN) is? This article will explain everything you need to know and how this financial tool could be beneficial to you. You'll get all the information you need to make informed decisions about TANs.

Tax Anticipation Note (TAN) Definition

Tax Anticipation Notes (TANs) are short-term municipal bonds issued by state and local governments to finance cash flow shortages during the interim period before tax revenue is collected. These notes have a fixed maturity date and an interest rate that is generally lower than other forms of short-term financing.

TANs are a cost-effective way for governments to bridge the gap between immediate expenses and future tax receipts. They are often used for seasonal cash flow requirements, such as funding school district salaries or offsetting budget shortfalls. Unlike other forms of public debt, TANs can be issued without voter approval.

TANs are generally considered safe investments due to their low default risk and ability to generate tax-exempt income for investors. However, it is important to carefully research the specific issuing entity and its financial standing before investing in a TAN. Additionally, TANs are not a long-term solution for addressing budgetary issues and should not be relied on as a consistent source of financing.

In 2008, a small town in Pennsylvania faced a significant budget shortfall due to unexpected expenses for road repairs. To bridge the gap, they issued TANs with a maturity date of one year and an interest rate of 2.5%. The town was able to meet its immediate expenses and pay off the TANs with future tax revenue, avoiding the need for drastic budget cuts or raising taxes.

What is a Tax Anticipation Note (TAN)?

A Tax Anticipation Note (TAN) is a short-term debt instrument issued by state or local governments to fund current operations in anticipation of future tax revenues. TANs are usually issued within six months of the expected tax receipts and have maturities of up to one year. The interest rate on TANs is generally lower than on other short-term securities due to their tax-exempt status, but they are considered riskier investments since they are dependent on timely receipt of tax revenue.

TANs provide a source of cash flow for local and state governments, enabling them to meet their short-term financial needs. They are typically used to bridge the gap between when expenses are incurred and when tax revenues are collected. TANs allow governments to continue to provide essential services and make necessary investments in infrastructure and other projects.

It is important to note that TANs are not a long-term solution to financial problems, but are rather a short-term fix. Governments should not rely on TANs to fund ongoing operations or to cover budget shortfalls. Instead, they should focus on developing sound financial practices, maintaining adequate reserves, and pursuing other sources of revenue.

Pro Tip: Before investing in TANs, it is important to research the issuer's creditworthiness and financial stability, as well as the current economic landscape. Consider consulting with a financial advisor to determine if TANs are an appropriate investment for your portfolio.

Purpose of Tax Anticipation Notes

Tax Anticipation Notes (TAN) are a type of debt instrument that local governments use to finance short-term cash flow needs. TANs can bridge the gap between the collection of government tax revenues and the need to meet immediate financial obligations. These notes are repaid with interest using the funds collected from taxes.

Local governments issue TANs to cover expenses associated with public works projects, payroll, and other operating expenses. With TANs, local governments can avoid the need to raise taxes immediately and still make timely payments on bills and other obligations. TANs also provide local governments with cash to begin new projects while they await the tax revenues to arrive.

TANs are a popular financing option because they are typically low-risk investments that governments can easily repay. In fact, TANs have been used since the early 1900s to finance infrastructure projects. For example, Robert Moses, a famous New York City planner, used TANs to finance public works projects in New York City.

In summary, the purpose of Tax Anticipation Notes is to help local governments meet short-term cash flow needs. These notes provide a flexible financing option that allows local governments to pay bills, initiate new projects, and meet payroll obligations while they wait for tax revenues to arrive.

How Tax Anticipation Notes Work

Tax Anticipation Notes facilitate the efficient management of government cash flows by enabling them to borrow based on future tax revenues. This short-term borrowing method aids governments in meeting immediate budgetary commitments and cash flow needs. The lender issues a TAN to the tax-anticipating government, obligating the government to repay the note once the promised future tax revenues are collected. TANs typically have a maturity period of under a year and can be redeemed at a discount from face value.

The amount of TAN offered depends on the projected tax revenues, which are determined based on past tax revenues and current economic conditions. TANs can be issued either competitively or through negotiation with a single party, and their interest rate is based on prevailing market rates. TANs offer investors a low-risk, short-term investment option with higher yields than traditional savings accounts.

Tax Anticipation Notes also benefit taxpayers by ensuring that crucial services and projects are not stalled due to shortfalls in revenue. Local governments also make use of TANs to receive cash infusions before the collection of taxes, which fluctuate according to the region's economic situation.

It is believed that TANs were first issued in 1921 by Carver County, Minnesota, to fund a road-building project. Since then, TANs have become a regular feature of government finance, playing a significant role in funding the budgetary needs of various government agencies.

Advantages of Tax Anticipation Notes

Tax Anticipation Notes: Advantages to Consider

When it comes to the benefits of Tax Anticipation Notes (TAN), there are several crucial points to keep in mind. Here are three key advantages to consider:

  • TAN offers the government a quick cash flow solution at a lower cost than other borrowing options;
  • TAN allows the government to meet obligations without having to raise taxes or make deep cuts that could cause hardship for citizens;
  • TAN can help maintain services and keep the government running smoothly throughout the fiscal year.

It's also worth noting that Tax Anticipation Notes don't just offer advantages to the government. Banks and other investors can also benefit from investing in TANs, which can be seen as a relatively low-risk investment with a guaranteed return.

A true fact worth considering is that in some states, TANs have become a significant portion of short-term borrowing. According to the Pew Charitable Trusts, TANs made up 25% of Kansas' general fund borrowing in 2018.

Risks of Tax Anticipation Notes

Anticipated Tax Revenue Financing comes with financial risks that must be considered. By relying on expected tax receipts, borrowers may not receive the funds necessary to repay their obligations.

Borrowers must carefully analyze historical tax revenues and economic trends, as well as potential legal or governmental actions that could impact the collection of taxes. Additionally, tax anticipation notes face similar risks to other types of debt, such as interest rate changes and credit downgrades.

It is crucial to assess the borrower's financial standing and creditworthiness before investing in TANs. Investors must also ensure that the notes are issued by a reputable entity and backed by the full faith and credit of the issuer.

In the 1990s, the use of TANs by some municipalities in California led to a financial crisis, as the expected tax revenue did not materialize, leaving local governments unable to repay the borrowed funds. This serves as a cautionary tale for investors and governments alike.

Five Facts About Tax Anticipation Note (TAN) Definition:

  • ✅ Tax Anticipation Note (TAN) is a type of short-term borrowing used by state and local governments to finance current operations and projects in anticipation of future tax revenues. (Source: Investopedia)
  • ✅ TANs typically mature in less than one year and are backed by the issuer's full faith and credit. (Source: Securities and Exchange Commission)
  • ✅ The interest rate on TANs is typically lower than other forms of short-term financing because they are considered low-risk investments. (Source: The Balance)
  • ✅ TANs are often used to cover temporary budget shortfalls or to fund immediate capital projects before taxes are collected. (Source: Fiscal Tiger)
  • ✅ TANs can be issued in various denominations, ranging from as little as $1,000 up to millions of dollars. (Source:

FAQs about Tax Anticipation Note (Tan) Definition

What is a Tax Anticipation Note (TAN) Definition?

A Tax Anticipation Note (TAN) is a short-term debt instrument utilized by state and local governments to meet their cash flow needs. They are issued by governments in anticipation of future tax revenues, allowing them to borrow against these funds before they are collected. This allows governments to meet their immediate financial obligations without the need to delay critical projects or services.

How do Tax Anticipation Notes (TAN) work?

When an entity issues a TAN, investors purchase the notes for a specified dollar amount with the understanding that the issuer will repay the principal amount plus interest when tax revenues start to come in. The interest rate on a TAN is typically lower than that of other types of short-term loans, making them an attractive option for governments seeking to raise funds. These notes are generally due in a year or less.

What are the advantages of Tax Anticipation Notes (TAN)?

TANs provide several benefits to governments. First, they offer a relatively low-cost way for governments to borrow money they need for their operations. Second, TANs have flexible repayment terms, making them easier to manage for government entities. Third, they provide a way for governments to continue operating and delivering services while waiting for tax revenues to arrive.

What are the risks associated with investing in Tax Anticipation Notes (TAN)?

As with any investment, there are risks associated with investing in TANs. Due to their short-term nature, TANs are generally considered to be high-risk investments. Additionally, there is a risk that tax revenues may not be sufficient to cover the principal amount and interest owed on the notes. This could result in a loss for investors.

Who typically invests in Tax Anticipation Notes (TAN)?

TANs are typically purchased by institutional investors, such as mutual funds, pension funds, and insurance companies. These investors are attracted to the relatively low risk and higher interest rates offered by TANs. Additionally, some individuals may invest in TANs through a bond fund or other investment vehicle.

What is the difference between a Tax Anticipation Note (TAN) and a Revenue Anticipation Note (RAN)?

While both TANs and revenue anticipation notes (RANs) are short-term debt instruments used by state and local governments to cover short-term cash flow needs, there are some differences between the two. TANs are issued in anticipation of future tax revenues, while RANs are issued in anticipation of future revenue streams (such as tolls or fees). Additionally, the repayment priority for the two types of notes differs - TANs typically have a higher priority than RANs in the event of default.