There’s been a bit of a feud going on between Gov. Chris Gregoire and the state’s cities and counties.

But rather than fuel it during her speech Wednesday to the legislative conference of the Association of Washington Cities, the governor offered peace terms instead.

The feud started in October when she proposed ending the sharing of liquor profits and liquor taxes with local governments. If successful, the change would cost local governments about $70 million just as many are facing their own budget shortfalls.

Gregoire said she was forced to suggest it because of the state’s ongoing budget crisis but then added that local governments seem to have enough money to tempt away some of her top state government executives with big pay hikes.

That, in turn, led to a snippy letter from a batch of mayors, a letter that reportedly made few friends in the governor’s office.

Then, Gregoire proposed taking over the collection and administration of local government business and occupation taxes. The governor said she was pitching it as a way to make it easier for businesses that do work in many jurisdictions to pay their taxes. Rather than pay a bit to each city, which might have different rates and different rules, the business would pay to the state for both state and local taxes. Rules and administration would be the same for all jurisdictions.

The state would then send each city its share, after keeping an administrative fee.

But a group of big cities, including both Tacoma and Seattle, has termed it a power grab by the state – taking control of a local tax and then charging the cities for the service They are lobbying hard against a plan that would cost them both control and money.

But during her speech at the Olympia Red Lion Hotel, Gregoire said she was willing to work with the cities to make sure they retain control over the business tax.

“I respect your need to have control over taxation,” Gregoire said. “I’m convinced there’s a way we can agree.”

During a question and answer period following her speech, Gregoire was asked whether she would consider making the elimination of liquor-tax sharing temporary, rather than permanent.

“Yes,” she said. After a pause she said she didn’t make any of her budget choices lightly, that all were painful and all had repercussions.

“I tried to get us through the crisis,” she said. “I need your help and I need your sacrifice.”

The passage of the liquor privatization initiative reduced the impact of her proposal on local governments. I-1183 requires that local governments get the same amount from liquor profits that they did before its passage. That means Gregoire cannot keep the $43.8 million in profits as proposed.

But the state could keep all of the revenue from the liquor excise tax. That would cost cities and counties $26 million over the next 18 months.

Finally, Gregoire delivered what passes for good news on the budget.

“I expect the February (revenue) forecast to be flat,” she said. “I will cheer if it’s flat It hasn’t been flat for a long time.”