I think I need guidance from stronk7 and/or mudrd8mz.

Each install.xml file has a required VERSION attribute in the XMLDB root node. The Plugin Skeleton initializes this value to "today" when a new item is created. The XMLDB tool initializes and updates this value whenever the database tables, indexes, keys and columns are created/modified/deleted.

So it seems like VERSION should be a date string that matches the most recent edit. However, other than being displayed in the edit form within the XMLDB tool, this value is completely unused. When a plugin is installed, the version from version.php is used instead and during upgrades, the installed version from the database is compared against the current version in version.php.

Thus, as far as I can tell, the VERSION value in install.xml is at best only used by the XMLDB tool for live editing. Many changes to Moodle core do not appear to be using the XMLDB editor as they do not result in updated VERSION values. Instead, it appears to be an unused value which is causing some confusion.