Mind you, the decision was made with the release of (I think) Windows XP for x86-64, in 2005. I actually briefly used a computer with Windows 3.11 on it around that time (oh the wonders of school IT). I’m not saying Microsoft’s decision was wrong, though, only that the official rationale is kind of bullshit.

Couldn't you still run 16-bit apps in Windows 10 32-bit or did they drop it entirely by then?

In 2005 it was not only Win16 apps from 1993, but DOS3 apps from 1985 too.