Tax and Revenue Anticipation Notes

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we will discuss tax anticipation notes and revenue anticipation notes, both of which are types of municipal bonds whose security (interest and principal payments) are based on future cash, either collected by taxes or revenue.

Mr/Mrs. Mayor

Imagine you are the mayor of a small town. You thought it would be a nice way to occupy your time now that you are retired, but you vastly underestimated the demands of being a mayor, especially for this town. In fact, there are two pressing problems that you need to resolve. First, the town has expenses of $150,000 that it needs to pay next month, but it only has $50,000 in the bank and property tax collection (where you expect to receive $1,000,000) will not come until the end of next month. How are you going to fill the financial gap?

And second, a minor-league sports team wants to build a stadium in your town's downtown area. It would be wonderful to have this type of economic development. It would bring a lot of jobs, and the downtown area would receive an economic boost every time the team had a home game. The only catch is the sports team's owner wants the town's financial support. He specifically wants the town to raise property taxes to pay for the new stadium. Is there any way the stadium can be built with the town not taking on the financial obligation?

In this lesson, we'll help solve your (the mayor's) two problems. We'll give the formal definitions for revenue anticipation notes and tax anticipation notes, and then we'll try and resolve the two problems.

Definitions

A revenue anticipation note (RAN) is a municipal bond whose payments (interest and principal payments) are secured by the future revenue of a project. For RANs, the issuer is a government entity, the bond is issued to finance a project, and the future revenue comes from that project.

On the other hand, a tax anticipation note (TAN) is a municipal bond whose payments (interest and principal payments) are secured by future tax revenue. Governments largely finance themselves through taxes, like property taxes or sales tax, but the collection of those taxes is quite sporadic. Property taxes, for example, may only be levied and paid twice per year, and yet the government needs to fund itself over an entire year. They, therefore, need to spread out the tax proceeds. There are times when they try to spread out the proceeds but they still end up short. That's when they will issue a TAN to fill the financial gap.

Solving the Mayor's Problems

Revenue anticipation notes and tax anticipation notes can be used to help solve the mayor's two problems:

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support