xp for items is good
For all PCs I've had who have taken 1+ item creation feats, the increased power of the party and/or the PC was easily worth the XP. For that matter, when the DM is using 3.5 XP rules, someone who primarily creates items wants to typically be a level behind the rest of the party - they gain extra XP that way, and often the extra items can make up for being 1 level behind.
Frankly, I think that the main weakness of the system is that it treats the value of XP:GP as a constant ratio, whereas the standard tables for typical GP and required XP at any one level don't follow this. It ends up meaning that item creation is more valuable at lower levels, when gold is more of a limiting resource, and weaker at higher levels, when XP is more of a limiting resource. I think that ideally the XP:GP ratio for item creationshould be changed to a curve to match the changing XP:GP ratios, so that the value remains relatively constant.
So an item in the range of 50 GP might have the current ratio, whereas an item in the range of 200,000 GP might cost fewer XP and more gold than the current formula.