I don't know how near or far away the kid is, but I would say the best gift would be a day spent with YOU! You could make cookies with him and take him for a ride on the ferry or something and those things don't cost much. It would be a great surprise if you made up a coupon for him to use that says "Good for One Fabulous Day with" or something like that. It may sound a bit hokey, but it is a good present, and your sister would probably appreciate it too (free babysitting)! lol

Growing up, I'm sure I don't recall most of the gifts I was given (unfortunately), but one year my uncle arranged it so I could go for a train ride with him. He worked for the railroad, so it was easy for him to arrange. It probably didn't cost him anything, but it was seriously a great present and I'll always remember it!

Two year olds are very easily impressed, and maybe it could be something you do every year with him. You don't have to be rich to give a kid your time and attention, and in the end it always means more than any toy.

Music - Seattle has a great kids music scene. I recommend anything by Recess Monkey (which my kid loves), Caspar Babypants, or the Not Its (all from Seattle). Or, They Might Be Giants has wonderful kids albums, and as I suggested to someone else, Elizabeth Mitchell has the loveliest CD's for children, and your sister will appreciate her as well - just lovely, gentle, toddler friendly music, great for decompressing kids and moms both. Perfect music for a 2 year old. A great gift for around $10, and completely unique and special.

And maybe have someone take your picture doing something goofy and in Seattle, like feeding seagulls on the ferry or eating mini-donuts at Pike Place Market, frame it, and the next time they come to visit you can take him to that special place.

If you're not up for making wall art or a homemade mobile, there are many handmade and unique gifts available these days, especially at local toy stores and even consignment shops.

Books are always a good gift, especially ones that are by local authors. Sara Anderson & Matthew Porter have many wonderful books for two-year-olds.

I also agree with Kristin that some of the best gifts are activities you do together. I would consider looking into art and craft kits that are appropriate for young kids. Just because an activity is suggested for 3 or 4 year olds doesn't mean it's a not a fun activity for you and him to do together. (Just make sure he is supervised with the materials of course)
One idea is to make your own picture books. I hope these ideas help!

Books are great and if you go to a used book store you'll likely spend less and find things that are not available at Barnes & Noble and thus already purchased for the little guy. As long as you're not worried about used books looking cheap, this could be a good way to go. Of course he won't know they're used.

You're always going to have that challenge with the "has everything child" but it's not your fault the child has everything so you need to let go of that concern and just take a chance. I probably have the largest independent toy store in the northwest and I can assure you, my kids don't remotely have everything. At the young side of two one of the Chunky Melissa & Doug Puzzles can be fun for about $10.
An older two might like one of the varieties of extra large crayons shaped like blocks that are easier for small hands to hold $6-8. The younger kid Playmobil line called 123 has some reasonably priced toys and a variety of bath toys in that age range can be reasonable. Pick something you think you might have liked yourself. As always, with that age pay close attention to and stay away from "Not for under three" choke hazard labels.