The amount of annual property tax California's real property owners pay depends on the assessed value of the property. Typically, this is measured by the purchase price, plus an increase of no more than 2% per year, regardless of how much the property increases in value (thanks to Proposition 13's limit). For example, if you purchased a home in 2003 for $300,000, your property taxes for 2008 are based on a $300,000 basis, plus 2% per year for 4 years. This is true even if the current market value well exceeds $300,000. This 2% increase limit is a major benefit for owners whose property has increased in value.
However, if your property has decreased in value since you purchased it, Proposition 8 (passed in 1978 and having nothing to do with the current same-sex marriage ban Prop 8) also provides a benefit: You can apply for a "Decline-in-Value Reassessment" to contest the assessed value of your property, thus lowering your property taxes. Under Prop 8, you can apply to the County Assessor for a re-appraisal if you can show, primarily by way of comparables, that the value of your property has declined. Therefore, if your $300,000 home is now worth $200,000, and comparable homes in the area support that value, the assessor may grant your request and lower your assessed value, resulting in lower property taxes.
Some things to keep in mind: Even if the assessor does agree to lower your assessed value, your basis in the property remains the same your purchase price and the assessor is not bound by Prop 13's annual two-percent per year increase limit up to that amount. Therefore, even if the assessor reappraises your property at $200,000, if there is a sudden spike in property values, the assessor could reappraise it the following year back at $300,000, plus 2% per year since the year of purchase.
Nevertheless, there is no harm in exercising your rights under Prop 8 if you can get your assessed value lowered, it will do nothing but save you money until your property value increases to or above your purchase price and the assessor decides to re-visit the issue.