I've setup a dev site on a subdomain alongside the production site and modified the config.php and db.php files on both installs for a multi-environment config. Since I only need to work on plugins and template files on the 'dev' site, would it be crazy to have the 'dev' site use the same mysql database as the live site? What would be the downfall in doing this?
I wouldn't do it, personally. Especially if your plugin interacts with the database and you'll be creating/deleting tables, altering the schema, needing to restore the database, etc.
Too much risk in breaking the live site and very little benefit.