Yes. We do exactly this even though our production systems are 2005, and have run into very few issues. While there are some compatibility issues you'll want to know about there are also a few benefits:
- Sql Management Studio is based off VS 2008 so if you are using VS 2008 you don't get VS 2005 installed
- Sql Management Studio is faster and supports some nice new features such as intellisense
Our build machines have Sql 2005 which runs all our unit and integration tests. Our development and production test virtual machines that mimic our production systems also run Sql 2005. This way we ensure our SQL and DDL are compatible with production.
There is no way you can have a development environment that duplicates your production environment. We just install too much stuff on our machines to do our jobs or for downtime.