Question: has anyone else ran into an issue with diagnostic settings not getting created but pulumi showing it in state as being created and throwing an error it cannot create a duplicate diagnostic setting?

Yes, happens most often when deleting and recreating things with the same name. Especially if deleted resource sent logs to a workspace. That log then there for the retention period in a soft deleted state. Most times Azure clears out the metadata within 24 hours, but have seen it take longer.

Interesting. I was told something similar from azure for the underlying Log Analytics Workspaces itself, but they didn't mention that for the diagnostic settings.

With IaaS there an agent, so we can kind of force a reset by deleting and recreating. With PaaS something behind the scenes is maintaining that connection to the workspace. I remember in my 365 days, enabling some features would take 48 hours. Just called it "cloud time." Whether it right or wrong is subjective, but I don't know the inner workers of Azure. I just deal with the quirks to get things done.