The Executive Summary:

Before Proposition 13, there were two major flaws in California's property tax system:

1. Property taxes could be assessed by cities, counties and school boards.
2. Real property was assessed arbitrarily depending on skill, whims and other factors.

The results weren't too surprising:

A. Cities, counties and school boards would determine how much they wanted to spend, then would set property taxes to bring in that amount.
B. Assessors had wide discretion and some used it so indiscreetly they ended up in prison.
C. Gross disparities in property tax resulted (e.g., one property assessed at 4.6% another at 114% of its market value).
D. Property taxes skyrocketed and assessors had a field day when home prices shot up in the early 1970s. That was only a paper increase in theoretical "net worth" - home owners' incomes did not double or triple to match. As a result, many homeowners - especially those on fixed incomes and at the lower end of the economic scale - had to sell their homes since they couldn't pay the taxes.

So on June 6, 1978, Proposition 13 was passed with a 65% to 35% vote. The majorfeatures are:

i) The property tax basis was changed from "assessed value" to "acquisition value" and is readjusted when the property is sold.
ii) The tax is set at 1% of the purchase price.
iii) The tax may not be increased more than 2% per year.
iv) Any new construction is assessed in addition to (ii) and (iii) [you can't add $1 million in new construction and pay $100k property taxes].