Our daylight basement is not finished (but heated) and there are two very large windows installed that open horizontally. There is tar paper tacked down to the sill plate that the windows are installed directly above. There is a substantial draft between the window and the sill plate...enough that we're observing some condensation on the tar paper. What should I use to "plug" the draft and minimize condensation in that location?

you can use a spray foam insulation. Do NOT USE the stuff that is in the red can with yellow top sold at the big box stores. They have spray foam that is used just for windows and doors. It expands but does not apply pressure against the window jamb causing it to bow. I think its a blue can.
Simpy apply the foam around the cracks of the windows and your issues should go away.
What is causing the moisture is the cool outside air that is entering around the tar paper is condensing the warm moist air from the inside of the house.
You can also use fiberglass insulation. Simply pull small amounts off and push into the space around the windows with a paint stick. Pack it firmly but not so tight to bow the frame.

Thanks very much. It looks like they packed fiberglass above the window so I was thinking that should work below as well. I appreciate the advice.