I think I can justify a starting salary at step 8 which is about 25% more than the initial offer. Realistically, I would accept a starting salary at step 5 which is about 13% more than the initial offer.
How should salary negotiations for positions with a fixed pay scale be handled?
Reply to the email (in person if possible, by phone if not) that you are excited about the position, but need to discuss the offer package.
Indicate that you believe you should come in at Step 8, and talk about your justifications.
Since you are clear on what you are willing to accept, be ready to reject all offers below Step 5, and be ready to accept any offers at Step 5 or above.
In some contexts, the initial Level and Step are not negotiable. If that's the case here, then you have already made your decision - you have indicated that you will not accept. Thank them for the offer, indicate why it is too low, move on to the next job on your list, and don't look back.