My development machine is running Windows XP SP2 (and IIS 5.1 by implication).
Until recently our deployment environment was based around Windows Server 2003 (and therefore IIS 6.0).
We are about to move to Windows Server 2008 (and therefore IIS 7.0) for a new project.
Our projects use ASP.NET MVC and WCF Services.
Are there any key reasons for us to upgrade our development machines to run Windows Server 2008 (or possibly Vista, since this also comes with IIS 7.0)?
I would say it's in your best interest to upgrade your development machines to emulate as much of the production environment as possible within your means and resources. Otherwise you may fall into traps you're completely unaware of just by deploying an application from your development machine to the server's environment, which may pertain to differing versions of IIS, the version of .NET framework each machine is running, or just the way the code is compiled or executed at runtime.
Especially since IIS 7 has been vastly upgraded since IIS 5.1, why shouldn't you work closer with it's current functionality while developing before you missing out on some great opportunities? To really know what to expect from an application in production, develop it under the same circumstances.
Edit/Added: This link may help you see at least one significant example of how differing versions can affect your project.
I would recommend that you develop against the same major build as you intend to deploy on. That said, this leaves you with a few options. First, you could build against your local IIS installation (as it appears you currently do). That means that all of your boxes should likely be upgraded to Windows Vista or Windows 2008 Server (or Windows 7 as it is running IIS 7.5). Your second option is to deploy to a remote machine. It is entirely possible to deploy your application to a remote test machine running IIS 7 and remotely debug as well. The problem is that if you have more than one developer working on the remote site, it becomes problematic. IIS can handle the remote debugging on different webs for different developers, but depending on your architecture and configuration, you may still be sharing resources between instances of test web applications.You could occasionally deadlock each other. The only benefit is that you don't have to buy licenses for all of your machines (and potentially upgrade hardware to support the OS upgrade). However, I think that would be short-sighted. The loss of developer productivity wouldn't be worth it, IMHO.
There are major changes between IIS 5.1 and IIS 7.x. The changes to the architecture, such as the integrated pipeline, can result in drastically different behavior and compatibility issues. I think you will find that IIS 7 far more developer-friendly. The introduction of things such as failed request tracing, extended logging, and enhanced error pages alone make it much easier to track down errors in your application. In that regard, the upgrade is well worth it.