"The encroached neighbor" should immediately review the specific facts with the encroached neighbor's attorney.
Outside of complaining to the appropriate government office that the legally required setback was not met, the encroached neighbor cannot do anything about the house itself as the house does not encroach on the encroached neighbor's land.
Given that the house was built in 1972, the government may not be able to do anything about the house now.
However, the encroached neighbor has standing to start a legal proceeding when something encroaches the encroached neighbor's land.
In WA, rights acquired by adverse possession generally takes 10 years.
"the encroaching neighbor also believes they have a right to keep things the way they are now" likely would be legally incorrect.
So, the encroached neighbor should want to do something now before losing the right to do something about the encroaching objects.
I agree with the other answer, but wanted to add a few points.
First, whose recent survey was this? Was the survey for the "encroaching property" or the "encroached property"? Was a survey provided when the deck permit was obtained? What did it show? Are the properties platted? What does the plat show about the configuration of the lots? Before getting into a huge fight, it might be good to get another opinion about the property boundaries.
If both properties are within a subdivision, there may be covenants or declarations that have been violated, and which could be enforced.
Both parties are probably going to have to "laywer up" to resolve this, and no one can give you good legal advice without seeing deeds, plats, surveys, etc. for the properties. Both parties should collect all the backup material available to help the attorneys evaluate their positions and options.
I agree with the other answers, but let me add a little from the perspective of a Washington attorney. Of course, the concern is that the neighbor has or will acquire some sort of ownership by the encroachment by adverse possession. There are two important considerations to that, though. First, the presumption is that a use of another's property is permissive - not adverse. So long as the use is permissive, the ten-year adverse possession time doesn't start running. Permission can be shown in a lot of ways, and is more a factual than a legal question. Second, a "structure" - which a deck likely is - cannot generally encroach into the side-yard setback areas of a lot, which vary based on zoning. There is even some law that says that an adverse possession that violates the law will not ripen into ownership. Perhaps more importantly, from a practical standpoint, is that the violation of the setback can be abated by the City (or by you using one of a number of procedures). You might even want to check with the local fire authority. Bottom line, if the encroachment is not a problem physically for you, but the concern is adverse possession, get the neighbor to sign an acknowledgment that it is using the property with your permission. If it is a problem, then first try to get the City to do its job. If that doesn't work, a trespass/quiet title action may be necessary. The Courts are not particularly reluctant to make people tear down such encroachments (even entire houses, on occasion) when the trespass is intentional. With a trespass action, there is even some potential to get damages and reimbusement for your legal fees. Sounds like you have a pretty good legal case, but litigation won't do much for your neighborly relations! Finally, technically, you can protect your private property; i.e., you could possibly tear those improvements out of there. Not recommended. Get the City or a Court behind you before such a precipitous action. A possible practical solution: sell the neighbor the property they need, subject to a boundary line adjustment, if you don't need the property for your own use. Good luck!