Cohesin is crucial for proper chromosome segregation but also regulates gene transcription and organism development by poorly understood mechanisms. Using genome-wide assays in Drosophila developing wings and cultured cells, we find that cohesin functionally interacts with Polycomb group (PcG) silencing proteins at both silenced and active genes. Cohesin unexpectedly facilitates binding of Polycomb Repressive Complex 1 (PRC1) to many active genes, but their binding is mutually antagonistic at silenced genes. PRC1 depletion decreases phosphorylated RNA polymerase II and mRNA at many active genes but increases them at silenced genes. Depletion of cohesin reduces long-range interactions between Polycomb Response Elements in the invected-engrailed gene complex where it represses transcription. These studies reveal a previously unrecognized role for PRC1 in facilitating productive gene transcription and provide new insights into how cohesin and PRC1 control development.