This is the original sentence, apparently from a test prep booklet:
As early as 1865, there had been proposals for a New York subway, but that
took decades to resolve the many political, financial, and technical challenges.
This is ACTPREP's rewrite of it:
As late as the 1901, there had been proposals for an innovative carriage, but that took centuries to resolve.
The rewrite leaves out the whole clause "the many...technical challenges". Omitting that makes it look like "that" must refer to either "proposals" or "innovative carriage", and doesn't really work well with either, for previously disccussed reasons. If it did in fact refer to either of those, either "it" or "that" would have fit, albeit poorly. With the missing clause it's clear that "that" does not in fact refer to either of them, and "it" fits better, again for reasons previously discussed.
Farmer's in fact right. The redrafted statement has serious problems.