Hi @Christopher Fryett
Thank you for reaching out to Microsoft Q&A.
Managed Identities will only work via Azure resource as it is a system assigned or user assigned identity.
For local development using Visual Studio Code, You can use your Azure user account to for authenticating with the connector and add your user account in Key vault access policy or Provide Key vault administrator rbac roles, For database you can use Connection string or Microsoft Entra MFA login locally.
You can create separate workflow for local development and managed identity workflow for Prod related Azure development and parameterize it to change.
You can test your development in another logic app in another subscription as well that is your rnd or nonprod subscription or Logic app and then push the changes to the Prod Logic app.