Definition
A Tax Anticipation Note (TAN) is a short-term, interest-bearing security issued by state or local governments. TANs are used to meet immediate budgetary expenses, particularly when there is a timing mismatch between expenses and revenue inflows from taxes. The maturity period of TANs typically ranges from a few months to a year, and they are retired using the revenue from future tax receipts.
Examples
-
State Government TAN: A state issues TANs to fund educational and infrastructure projects in anticipation of property tax payments that are scheduled to arrive months later.
-
City Government TAN: A city municipality issues TANs to maintain public services and pay salaries of municipal workers while awaiting income tax revenues from corporate and individual tax filings.
Frequently Asked Questions (FAQ)
Q1: Why do governments issue TANs?
A1: Governments issue TANs to manage cash flow mismatches. When expenditures occur before revenue is received, TANs provide the necessary liquidity to cover these expenses temporarily.
Q2: How are TANs repaid?
A2: TANs are repaid using the expected tax revenues once they are collected. For example, property tax revenue or income tax receipts are typically used to retire the outstanding TANs.
Q3: Are TANs a secure form of investment?
A3: TANs are generally considered a reliable and secure investment because they are backed by anticipated tax revenues. However, the specific security of a TAN can depend on the creditworthiness of the issuing government entity.
Q4: What happens if the expected tax revenue is not received?
A4: If the expected tax revenue falls short, the government may need to find alternative funding sources to repay the TANs, such as issuing new debt or reallocating budget items.
- Revenue Anticipation Note (RAN): Similar to TANs, these are issued in anticipation of future revenue other than taxes, such as federal aid or grants.
- Bond Anticipation Note (BAN): Short-term notes issued with the expectation of issuing long-term bonds in the future to fund projects.
- Grant Anticipation Note (GAN): Short-term debt instrument issued in anticipation of receiving grant money from the federal or state government.
- Municipal Bond: Longer-term debt instruments issued by local governments to finance capital projects.
Online References
Suggested Books for Further Studies
- “Public Budgeting Systems” by Robert D. Lee Jr., Ronald W. Johnson, and Philip G. Joyce
- “Municipal Finance: Concepts and Practices” by George E. Peterson and Patricia Clarke Annez
- “The Essentials of Municipal Finance” by Michael E. Bell and Alfred Sarasin
Fundamentals of Tax Anticipation Note (TAN): Public Finance Basics Quiz
### What is the primary purpose of issuing a Tax Anticipation Note (TAN)?
- [x] To finance immediate government expenditures pending receipt of tax revenues.
- [ ] To fund long-term infrastructure projects.
- [ ] To attract foreign investments.
- [ ] To cover employee salaries permanently.
> **Explanation:** TANs are issued to finance immediate expenditures in anticipation of future tax revenues, helping to manage cash flow mismatches.
### What secures a Tax Anticipation Note?
- [ ] The government’s general assets.
- [x] Anticipated future tax revenues.
- [ ] External loan guarantees.
- [ ] The personal guarantees of government officials.
> **Explanation:** TANs are backed by specific, anticipated future tax revenues, making them a secure short-term investment instrument.
### How long is the typical maturity period for a TAN?
- [ ] 5 years
- [x] Less than one year
- [ ] 3 years
- [ ] 10 years
> **Explanation:** TANs are short-term obligations with a maturity period that usually ranges from a few months to one year.
### Which type of government entity typically issues TANs?
- [ ] Federal government
- [x] State or municipal governments
- [ ] International bodies
- [ ] Private corporations
> **Explanation:** State and municipal governments issue TANs to manage cash flow and finance current expenditures pending tax revenue receipts.
### What happens if the expected tax revenue is not sufficient to repay the TANs?
- [x] The government may need to find alternative funding sources.
- [ ] The TANs automatically become a grant.
- [ ] The repayment period is extended by default.
- [ ] The investors must absorb the loss.
> **Explanation:** If expected tax revenues are insufficient, the government must find alternative sources to repay the TANs, such as issuing new debt.
### Which term is closely related to TANs and involves borrowing against future non-tax revenues?
- [ ] Bond Anticipation Note (BAN)
- [x] Revenue Anticipation Note (RAN)
- [ ] Certificate of Deposit (CD)
- [ ] President’s Note (PN)
> **Explanation:** Revenue Anticipation Notes (RANs) are similar to TANs but are issued against future non-tax revenues such as federal or state aid.
### Why might an investor consider TANs a secure investment?
- [x] They are backed by anticipated tax revenues.
- [ ] They are insured by private insurance companies.
- [ ] They are long-term savings instruments.
- [ ] They are backed by gold reserves.
> **Explanation:** TANs are considered secure because they are backed by the anticipated tax revenues of government entities.
### In addition to TANs, which instrument involves short-term borrowing with an expectation of issuing long-term bonds in the future?
- [ ] TAN Anticipation Note (SEO)
- [ ] Individual Retirement Account (IRA)
- [x] Bond Anticipation Note (BAN)
- [ ] Saving Certificates (SC)
> **Explanation:** Bond Anticipation Notes (BANs) are short-term securities issued with the expectation that long-term bonds will be issued to fund the projects.
### Are TANs usually issued with interest?
- [x] Yes, TANs are interest-bearing securities.
- [ ] No, TANs typically do not carry interest.
- [ ] Only if they are issued by federal authorities.
- [ ] Interest is contingent upon market conditions.
> **Explanation:** TANs are typically interest-bearing securities, providing investors with a return on their short-term investment.
### What is required more often to accurately anticipate the revenues backing TANs?
- [ ] Detailed environmental studies.
- [ ] Annual general meetings with the public.
- [ ] Strong fiscal policies and budgetary forecasts.
- [x] Accurate revenue projections and financial planning.
> **Explanation:** Accurate revenue projections and effective financial planning are crucial for anticipating the revenues that will back TANs.
Thank you for exploring the concept of Tax Anticipation Notes (TANs) with us. Keep enhancing your knowledge in public finance and municipal securities!
