I'm confused on how the pulley keeps turning when I'm in gear.

Because there is about a million things between that pulley and the rear tires. Each set of gears, bearings, u-joints, tires and even the axle shafts add up to a lot of elasticity in the system. That will give you the ability to "wind" up everything and it is really hard to put real torque to it (even with the impact). Your clutch could be slipping a bit too.

Get the flywheel wedged tight, just be careful not to do it in a manner to break the bellhousing. After that the impact or long breaker should do the trick.

Good Luck,
Michael