The Paragraph Style tool is implemented using native browser commands and its functionality is based on browser logic which is not controlled by the Editor.
The mentioned behavior makes sense. The <small> tag is used as an inline element and as one its natural purpose is to be set as one, so the browser put is as a child and not as a replacement to the parent one. I suggest referring to this help material
for more clarification on this matter.
On a side note, if you need somehow a custom functionality, so that you can entirely change the design of the content I can suggest implementing an entirely Customized Dropdown Tool
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