TLDR: If you have Launchbox Premium, clear the Exit Game option Game Controller Mappings in Launchbox. This option does not exist in the free version of Launchbox.
You are correct. I was trying to diagnose it with every avenue I could think of, wondering if it was somehow reading the config of my other Retroarch folder where Select+Start is quit. I didn't have any controller virtualization running, at least intentionally, but I turned everything else off to test and it still happened. Well everything except Retroarch...and Launchbox.
In Launchbox options, there's a setting at the bottom of the list for game controller mappings. You only get access to some of these functions if you have a premium Launchbox license, which I do, and I imported C64 Dreams into my existing library. One of those functions is Exit Game which was mapped to Button 7 + Button 8. So after clearing that mapping, it works as expected.
Thanks for the help.