[Marius Crowne] “However, when I drop them into the timeline and they scale automatically, in the effects controls it says the clip is at 100% scale”
This is correct. The automatic sequence scaling does not modify the clip scale parameter so that the clip is scaled to the sequence but the scale propery is at 100%.
[Marius Crowne] “Therefore, when I try to punch in the quality of the clip degrades.”
That really shouldn’t happen, but you can turn on maximum render quality in your sequence settings.