Climate change has the potential to impact headwater streams in the Arctic by thawing permafrost and subsequently altering hydrologic regimes and vegetation distribution, physiognomy and productivity. Permafrost thaw and increased subsurface flow have been inferred from the chemistry of large rivers, but there is limited empirical evidence of the impacts to headwater streams. Here we demonstrate how changing vegetation cover and soil thaw may alter headwater catchment hydrology using water budgets, stream discharge trends, and chemistry across a gradient of ground temperature in northwestern Alaska. Colder, tundra-dominated catchments shed precipitation through stream discharge, whereas in warmer catchments with greater forest extent, evapotranspiration (ET) and infiltration are substantial fluxes. Forest soils thaw earlier, remain thawed longer, and display seasonal water content declines, consistent with greater ET and infiltration. Streambed infiltration and water chemistry indicate that even minor warming can lead to increased infiltration and subsurface flow. Additional warming, permafrost loss, and vegetation shifts in the Arctic will deliver water back to the atmosphere and to subsurface aquifers in many regions, with the potential to substantially reduce discharge in headwater streams, if not compensated by increasing precipitation. Decreasing discharge in headwater streams will have important implications for aquatic and riparian ecosystems.