Here's my setup:
Rotary encoder with A/B pins connected to pins 2/3 on the attiny85
All attiny pins connected to Tiny AVR Programmer with jumpers
Attiny clock set to 8mhz

Here's some sample code I tried -- not to interface with the encoder, just to get the chip to send a simple serial signal so I could confirm whether it even could work at all, so I found this code in another forum:
#include <SoftwareSerial.h>
SoftwareSerial Serial(3, 4);
void setup() {
Serial.begin(9600);
}
void loop() {
Serial.println("Hello World!"); //Print this once every second.
delay(1000);
}
When I open the serial monitor, I see no activity. I tried different pins, different baud rates, different MHz settings (1 and 8, no higher!). Still...nothing.
I have another project (called RGB_trig) where I use the rotary encoder (successfully, I might add!) to adjust an RGB LED. When I try to combine this serial setup with the code (even just the #include at the top) and include a serial.println to be called when the rotary encoder triggers, I get this error:
libraries/SoftwareSerial/SoftwareSerial.cpp.o (symbol from plugin): In function `SoftwareSerial::read()':
(.text+0x0): multiple definition of `__vector_2'
sketch/RGB_trig.ino.cpp.o (symbol from plugin):(.text+0x0): first defined here
collect2: error: ld returned 1 exit status
Multiple libraries were found for "SoftwareSerial.h"
Used: /Applications/Utilities/Arduino.app/Contents/Java/hardware/arduino/avr/libraries/SoftwareSerial
exit status 1
Error compiling for board ATtiny25/45/85.
Why can't it compile all of a sudden? I don't have multiple libraries of SoftwareSerial.h. I checked that directory, and it's just one file. Is this because I have an interrupt set up for the encoder? I use an interrupt so that I don't have to rely on a loop to adjust the LED brightness. Let me know if you all need to see my code for this.
Thoughts? All I want to do is trigger a serial print output when the switch is triggered so I can study its output and determine if it needs to be debounced.