Proposition 13 (Prop 13) was approved by California voters in 1978. One main result, though it has many facets (see http://igs.berkeley.edu/library/htTaxSpendLimits2003.html for a great history and description), was to limit the growth rate of property taxes and constrain local municipalities from increasing it at a rate that kept pace with inflation. This maximum growth rate created two winners: homeowners on fixed incomes that could theoretically be financially forced to sell due to rising property taxes that outpaced inflation adjustments to their income and multifamily home landlords which now had a cap on escalating property taxes versus the rent they could charge to keep pace with inflation. Whether residential or commercial property owners gained directly from Prop 13's tax constraint is difficult to assess.

The two largest changes to California's economy was that funding for municipalities, specifically schools, was now constrained and property taxes no longer acted as an incentive (or disincentive) toward the optimal allocation of property. As a student in public schools throughout the 1980s, the effects were somewhat obvious on materials available, teachers retained and campus grounds. For commercial property owners, vacant space could lay dormant at a relatively low cost of property taxes, especially during recessions; landlords have a tax disincentive to sell and buy new, higher-priced property, thus commercial property markets did not act like markets anymore. The same held for residential property until that market saw exponential gains in the 1990s and early 2000s.