Windows Server 2019 and SQL Server Backups issue?
this is a local directory. SQL Server is on the server and is attempting to backup to a directory ON the server


If SQL Server has access permissions on the directly, how can it NOT have permissions on the directory?

You're backing up to a share, not a directory.  When accessing a share the account must have permissions both on the share and the underlying directory.
Also it's possible that a Credential is used for NTLM auth to the share and it's attempting to authenticate using some other configured identity.
Change the backup to point directly to the local folder.