Question

why does litmus paper work with baking soda solution and not dry baking soda?

Answer 1

Baking Soda is a base and there it dissociates to release OH negative ions and  the dissociation takes place only on making the solution and thus the
baking soda solution and not dry baking soda. Litmus paper changes color on the basis of concentration of the OH negative or H3O positive ions.

Answer 2

Litmus paper is designed to be used in solution