When sponge converts from minecraft:sponge to minecraft:wet_sponge, it does not give a block update as expected.
(does not affect observers)
Video: https://youtu.be/vFIWmfl7lSA
Related issues
Comments

Can confirm in 1.17.

Can confirm in 1.17.1 Release Candidate 2. I suspect this was done on purpose for performance reasons, since using sponges to drain out large amounts of water causes the game to become nearly unplayable in lower-end hardware.

can confirm in 1.18.1
Actually, let's keep this open instead, MC-107664 has become a bit unwieldy and should probably be split up anyway.