Its passage resulted in a cap on property tax rates in the state, reducing them by an average of 57%. Proposition 13 received an enormous amount of publicity, not only in California, but throughout the United States. Its passage presaged a "taxpayer revolt" throughout the country.
Proposition 13 was officially titled the "People's Initiative to Limit Property Taxation." It passed with 65% of voters in favor and 35% against, with 70% of registered voters participating. It was placed on the ballot through the California initiative (or referendum) process under which a proposed law or constitutional amendment, termed a "proposition," is placed on the ballot once its backers gather a sufficient number of signatures on a petition. When passed, Proposition 13 became article 13A of the California state constitution.
Under Proposition 13, the real estate tax on a parcel of property is limited to 1% of its purchase price, forever, until the property is resold. The proposition was passed, in part, due to homeowner anger at ever-increasing tax rates. Homeowners whose homes have appreciated in value since Proposition 13 have greatly benefited. Owners of commercial real estate have also benefited; if a corporation owning commercial property (such as a shopping mall) is sold or merged, but the property stays deeded to the corporation, ownership of the property can effectively change hands without triggering Proposition 13's provision that fixes the amount of tax based on the property's resale value. Critics of Proposition 13 therefore argue that it unfairly benefits commercial property owners and should be changed.
Faced with shrinking revenue, both from Proposition 13 and from the state's retention of most property tax revenue (which formerly went to localities — cities and counties), California localities have recently sought their voters' approval for "special assessments" that would levy new taxes earmarked for services that used to be paid for from property taxes — such as street lighting, police and fire protection, and sewers.
Other measures California localities have taken to bolster their tax revenue is to condemn property using eminent domain for the purpose of attracting large retail development. The sales tax generated by the "big box" retailers is more attractive to the localities than is the property tax revenue generated by the former use of the property.
In the 2003 California recall election in which Arnold Schwarzenegger was elected governor, Schwarzenegger advisor Warren Buffett suggested that Proposition 13 be repealed or changed as a method of balancing the state's budget. Schwarzenegger, perhaps realizing that to advocate changing Proposition 13 was to touch a political third rail, said, "I told Warren that if he mentions Proposition 13 again he has to do 500 sit-ups."
Residents of other states that lack a ballot initiative process have been less than successful in persuading their legislators to limit tax increases or to cap or to reduce tax rates. The U.S. Constitution also does not provide for ballot initiatives (or referenda) under which proposed legislation can be submitted directly to the voters.