Thanks jpf for the hint. A couple comments on the hint and your followup:

There's no reason to expect Terminal to do anything with terminfo stuff, it's programs started in the Terminal session that use the curses and/or terminfo libraries which use the compiled terminfo files.

~/.terminfo does work for me. You have to duplicate the directory structure, so just putting xterm-color in ~/.terminfo isn't enough, you have to make a 78 directory then put xterm-color in that. Once I do that, I see the new behavior, and if I rename the directory, I see the old behavior.

Setting TERMINFO to the directory path also works for me, so if you want to share the terminfo entry among accounts you can make a directory some shared placed and set TERMINFO in the appropriate place(s).

For those interested, man curses describes all the places compiled terminfo files can be placed. There's a bunch of them, although I suspect ~/.terminfo or TERMINFO are sufficient for most people.