Council leaders have accused Humza Yousaf of a “serious breach” of the deal he signed with them just months ago as they demanded more money to agree to a council tax freeze.
The local authority umbrella body Cosla said the First Minister had chosen “to undermine the spirit and the letter of the Verity House Agreement” by springing the freeze plan on them this week.
The New Deal for Local Government signed in June promised "no suprises" on budget matters.
But without warning local government, Mr Yousaf told the SNP conference on Tuesday that the levy would be frozen next year to help people through the cost-of-living crisis.
The move involved abandoning a planned structural reform of Band E to Band H bills that would have raised £175m a year, and paying councils not to raise annual bills in the spring.
Offsetting a 3% rise would cost the Government around £100m, but most councils raised the tax by more than 5% last year, so the cost of the policy remains up in the air.
With the freeze due to start in April, the move was widely interpreted as an attempt to woo voters ahead of next year's general election.
After a meeting of council leaders today, SNP Cosla president Shona Morrison reiterated the "extreme disappointment” of the group at the way Mr Yousaf had behaved.
She also stressed it was for “councils alone” to set the tax locally “without interference from [the] Scottish Government”.
However, in a sign that leaders would be willing to swallow their pride if the Government paid them enough, Ms Morrison also said it would be wrong to walk away.
Calling for “tangible actions” to tackle underfunding, she said that If Mr Yousaf really wanted to help people in financial crisis he should be “funding councils fairly” to avoid cuts.
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In a statement, Cllr Morrison said: “Scotland’s Council Leaders again today reiterated their extreme disappointment that the First Minister chose to undermine the spirit and the letter of the Verity House Agreement, so soon after it being signed.
“Leaders reaffirmed the Cosla position that it is for individual Councils alone to set the level of council tax locally without interference or penalties from Scottish Government – pointing out that councils across Scotland are all identifying large budget gaps and the Scottish Government is now trying to take away one of the few opportunities councils have to plug that gap.
“There was a feeling from leaders that the announcement on council tax is a serious breach of the Agreement.
“But there was also a belief that for the good of our communities and public services in Scotland, we should not walk away. Local Government must do what is best for individuals, families, communities and businesses, and that means working to rebuild trust. But that will take tangible actions on the part of the Scottish Government.
“The chronic underfunding of councils right across the country is there for all to see and has been laid bare by this latest announcement.
“If the First Minister really wants to help people in financial crisis, funding councils fairly will save jobs and services, and avoid closures and cuts.
Leaders are to discuss the issue again at the monthly scheduled meeting on October 27.
Ms Morrison’s statement reflected a Labour-proposed form of words at Cosla today, which expressed anger at the "substance" and surprise nature of Mr Yousaf's annoucement, but also said councils should “engage with Scottish Government officials, without commitment, to explore compensation for a council tax freeze and what full funding might look like”.
The text was adopted on a 20-12 vote, with the Greens voting with Labour.
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The SNP said this amounted to Labour opposing a tax freeze "in substance".
SNP MP Drew Hendry said: "The SNP's council tax freeze will help millions of families across Scotland who have seen their household budgets hammered by the Westminster cost of living crisis.
"It beggars belief that the Labour Party has voted to increase council tax bills - and shows they are out of touch with hard pressed families.
"Just two days ago, the Labour Party finance spokesperson admitted they welcomed the SNP's council tax freeze - now they've voted against it. They're all over the place.
"The SNP will continue to stand up for families in Scotland in the face of the Westminster cost of living crisis - and put money back in people's pockets."
A Scottish Government spokesperson said: “The one-year freeze to Council Tax will benefit every Council Tax-payer in Scotland at a time when rising prices are putting significant strain on household finances.
“While several councils voted against the Cosla motion today, Scottish Ministers understand the concerns that are being expressed.
"That is why the First Minister and Deputy First Minister have held constructive meetings with Cosla to discuss these concerns, reiterating that the Scottish Government will be fully funding this freeze. This is on top of the real-terms funding increase given to them this year.
“The Scottish Government remains wholly committed to the Verity House Agreement, and is continuing work with Cosla on a new fiscal framework for local authorities.
"We are also working on longer term reforms to the council tax system, which are being considered by the working group on local government funding that we are chairing jointly with Cosla.”
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