Managing outdoor water use while maintaining urban tree cover is a key challenge for water managers in arid climates. Urban trees generate flows of ecosystem services in arid areas, but also require significant amounts of irrigation. In this paper, a bioeconomic-health model of trees and water use is developed to investigate management of an urban forest canopy when irrigation is costly, water has economic value, and trees provide ecosystem services. The optimal tree irrigation decision is illustrated for Albuquerque, New Mexico, an arid Southwest US city. Using a range of monetary values for water, we find that the tree irrigation decision is sensitive to the value selected. Urban deforestation is optimal when the value of water is sufficiently high, or alternatively starts low, but grows to cross a specific threshold. If, however, the value of water is sufficiently low or if the value of tree cover rises over time, then deforestation is not optimal. The threshold value of water where the switch is made between zero and partial deforestation is well within previously identified ranges on actual water values. This model can be applied generally to study the tradeoffs between urban trees and water use in arid environments.