Alright, I think I better understand what's going on. I found some online guide so I can wrap my mind around the open collector concept from here: Basics: Open Collector Outputs | Evil Mad Scientist Laboratories
Anyway, I have the Encoder common, Arduino GND and Encoder case ground to the 12v neutral.
I have the Encoder signal going to Arduino digital in and also through the 3k3 resistor to Arduino 5v.
With that, I'm reading things just fine. I have it reading on an interrupt and I'm converting the microsecond delay between interrupts into ft/min.
Yay, thanks for the help!