Hi @sawyerg and @cucotx. There is no way to use Arduino IDE 2.x as a dependency of that VS Code extension as there was with Arduino IDE 1.x.
The reason for this incompatibility is that the VS Code extension uses the command line interface of Arduino IDE 1.x. Arduino IDE 2.x does not have an equivalent command line interface.
The reason why the lack of a command line interface in Arduino IDE 2.x is not a deficiency, and why this lack does not impact the VS Code extension users going forward is that Arduino has created a dedicated command line tool that does everything the Arduino IDE 1.x command line interface did and far more, in a far more powerful, efficient, and user friendly manner. This tool is named "Arduino CLI":
Arduino CLI actually provides all the non-GUI functionality for Arduino IDE 2.x under the hood.
The VS Code extension has support for use with Arduino CLI in addition to Arduino IDE 1.x. You can learn about how to use it in Microsoft's documentation here:
This separation of the GUI application from the rest of the functionality is actually a very good thing for applications where the GUI aspects are not needed, such as scripts and alternative development environments like the VS Code extension. You can now install only the functionality you need and skip all the rest that you would never use. Compare the ~25 MB single executable Arduino CLI installation to the >500 MB Arduino IDE 2.x installation which contains >20k files!