Can I use an iPhone with no service for iOS development?
You should be able to use an iPhone with no service for development purposes.

There seemed to be a problem with this in the past due to the activation screen showing up, but there was a workaround even back then. I don't think Apple wants to force you into a $70 contract just for development purposes. One of the workarounds mentioned was to develop on an iPod Touch (if you don't need GPS functionality), but the others specifically mention how to bypass the activation screen on an iPhone.