Why is SN2 favored greatly over SN2' in this reaction?
While pi-based resonance effects are frequently important, you must always consider inductive effects in every reaction.

Electrostatically, there is a much higher positive charge on the ipso carbon than the beta carbon, because of inductive effects.  The net effect is that there is a lower energy of activation for nucleophile attack at the electrophilic center because the coloumbic forces are more favorable for attack there.  The softer the nucleophile and electrophile become, that less important this effect is, but it is still quite considerable.

Without doing the QM calcs, I would rate the phosphonium electrophile as quite hard.