Jille, I didn't notice that it smelled bad. In fact, I thought it smelled really nice when I received it from Kathy.
That causes me to think that the incense scent came from my handling it. I was so careful with it, always washed my hands and applied lotion before I'd sit down to work on it. The lotion is a woodsy scent. But if Jan noticed funky as well, then I dunno... Regardless, Sandy said in the beginning that she'd wash it after she's finished it completely.
Re the plastic bag, it's primarily for protection against other items in the box and packing materials, plus the possibility that the box becomes destroyed during transit. Tissue paper wouldn't protect it from any of that. Anything else (butcher or parchment paper, a Tyvek envelope) would probably have to be replaced by each knitter.
That's my take on it anyway... I considered dropping a cedar sachet in the bag, but decided that it might irritate someone's sensibilities.