Experimental manipulations provide a powerful tool for understanding an ecosystem's response to environmental perturbation. We combined paired eddy covariance towers with an experimental manipulation of water availability to determine the response of marsh carbon balance to drought. We monitored the Net Ecosystem Exchange of CO2 (NEE) in two ponds from 2004 to 2009 at the San Joaquin Freshwater Marsh (SJFM), and subjected one of the ponds to a yearlong drought treatment in 2007. The two ponds experienced similar flooding and environmental regimes before and after the drought, ensuring that differences between ponds were largely attributable to the 2007 drought. Drought substantially reduced surface greenness, as measured by the Enhanced Vegetation Index (EVI) and photosynthetic carbon sequestration, primarily by inhibiting leaf area development. Respiratory carbon losses were less influenced by drought than photosynthetic carbon gains. The effect of the drought lasted several years, with delayed leaf area development and peak carbon uptake rates during the subsequent year, and reduced leaf area for a couple of years. The combined effect of the drought and legacy effects created an overall loss of carbon that was equivalent to 4 years of the maximum annual carbon sequestration observed over a decade. Our results indicate that drought can have long-term impacts on ecosystem carbon balance and that future projected drought increases in Southern California will have a negative impact on marsh carbon sequestration.