So, after enabling the "microsoft incremental backups" the backup sizes are substantially smaller than they previously were, but still on an order of magnitude larger than they should be. Microsoft incremental backups are confirmed being used in the logs. (The line "Microsoft incremental backups will be performed." now appears under backup set detail information) and the reported size of the backup in the log remains unchanged at about 78 MB. (current log shows 78,171,751 bytes, previous log shows 71,236,990 bytes)
The actually space used for the avhd files for the current backup is 662 MB, the previous backup was 1.57 GB. I'm thinking I'm gonna run a test of backing up the server as though it were a physical machine to a temporary directory to see how much space it's full and, more importantly, it's incremental backup uses.