My son has a 2000 Z71 that is doing the same thing. I have a 2004 Z71 and the drive shaft does not turn. However, according to my mechanic there was a change made to the transfer case in later models (I'm not sure what year, but probably 2001) that changed this functionality. The older models (i'm sure your '99 is the same as the '00) do keep the drive shaft turning, while the later models do not.
Hope this helps.
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