Grasslands and savannas worldwide are experiencing increases in woody plant abundance. In the subtropical Rio Grande Plains of southern Texas and northern Mexico, this change in physiognomy typically results in soil C and N accumulation. The extent to which this accumulation is the result of increased C and N inputs vs. decreased losses is not known. To address this issue, we compared soil C and N pools, soil respiration, soil microbial biomass, and potential C and N mineralization and nitrification rates in remnant grassland communities and adjacent woody plant communities known to have developed on grassland within the past 100 years. Mean soil organic C (SOC) and total N pools in the upper 20 cm of the profile were 2× larger in wooded communities (3382 and 273 g/m2 for C and N, respectively) than in remnant grasslands (1737 and 150 g/m2). The larger pool sizes in the wooded communities supported higher annual soil respiration (SR; 745 vs. 611 g C·m-2·yr-1 for woodlands and grasslands, respectively) and greater soil microbial biomass C (444 vs. 311 mg C/kg soil), potential rates of N mineralization (0.9 vs. 0.6 mg N·kg-1·d-1) and nitrification (0.9 vs. 0.4 mg N·kg-<sup>1·d-1). However, despite higher SR rates, mean residence time of near-surface SOC in wooded communities (11 years) exceeded that of remnant grassland communities (6 years). The fact that increased fluxes of soil C and N were accompanied by increases in SOC and N pools and total SOC mean residence time suggests that shifts from grass to woody plant dominance have increased both labile and recalcitrant pools of SOC and total N, the latter to a greater extent than the former. Given the widespread increase in woody plant abundance in drylands in recent history, the observed net increase in soil C storage that potentially accompanies this change could have global implications for C and N cycling and the climate system.