As climate change exacerbates drought stress in many parts of the world, understanding plant physiological mechanisms for drought survival is critical to predicting ecosystem responses. Stem net photosynthesis, which is common in arid environments, may be a drought survival trait, but whether the additional carbon fixed by stems contributes to plant hydraulic function and drought survival in arid land plants is untested. We conducted a stem light exclusion experiment on saplings of a widespread North American desert tree species, Parkinsonia florida, and after shading acclimation, we then subjected half of the plants to a drought treatment to test the interaction between light exclusion and water limitation on growth, leaf and stem photosynthetic gas exchange, xylem embolism assessed with micro-CT and gravimetric techniques, and survival. Growth, stem photosynthetic gas exchange, hydraulic function, and survival all showed expected reductions in response to light exclusion. However, stem photosynthesis mitigated the drought-induced reductions in gas exchange, xylem embolism (percent loss of conductivity, PLC), and mortality. The highest mortality was in the combined light exclusion and drought treatment, and was related to stem PLC and native stem-specific hydraulic conductivity. This research highlights the integration of carbon economy and water transport. Our results show that additional carbon income by photosynthetic stems has an important role in the growth and survival of a widespread desert tree species during drought. This shift in function under conditions of increasing stress underscores the importance of considering stem photosynthesis for predicting drought-induced mortality not only for the additional supply of carbon, but its extended benefits for hydraulic function.