Entity Reference explicitly excludes entities that extend ConfigEntityBase from being used. A couple of things:
- It should not exclude ConfigEntityBase, but ConfigEntityInterface, as not all configuration entities may extend the base class.
- The code comments in entity_reference_field_settings_form() say the workaround is because EFQ does not work on config entities, #1853856: Document that ConfigEntityBase and ConfigStorageController are tightly coupled, and #1846454: Add Entity query to Config entities. However, as chx explained to me, this limitation is simply because entity reference cannot yet properly link to either IDs or machine names, as the DB columns to store references have to be of a particular type (int/string), and casting values during joins does not perform well.