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Definition: Tax Anticipation Note - TAN
TAN are notes or short term debt securities issued by state, municipal or local government to finance current operations and immediate projects before tax revenue are received. Government uses tax anticipatory notes to borrow money to finance capital projects. The borrowing is at a low interest rate and for short term typically for one year or less. The debt is repaid by the following year's tax revenue.
TAN are used by local governments to fund gap between timing of the receipt and their expenditure. This short term debt obligation smoothes out the ups and down in the revenue cycle in anticipation of future tax collections. These notes under the understanding that specific amount of tax revenue will be available in stipulated time allows municipality to fund capital projects like building schools, road and infrastructure now rather than waiting for collection of actual tax revenue.
The income earned from TAN are exempted from income tax similar to the income earned from municipal bonds. They hold the first claim on the money collected a tax receipts. They are a low risk security and sometimes are also called as tax anticipation warrant. In order to generate revenue, local government can also issue revenue anticipation notes or bond anticipation notes.