Nylon= no good.
There's too much sheer force on the nut/bolt combo when you're turining your wheel and nothing to hold it in place, that bushing will give and your steering will get sloppy, ask me how I know.  If you've got access to a Lowe's you can find S/S bushings just like the nylon one you have, add some A/N washers to minimize the friction and you're shittin' in tall cotton.

Ok, first off, I just looked at your pic again, you've already got the swivel deal that Beerjet was refering to, take those washers out, loosen the swivel thing a bit and retighten the bolt in the tiller arm, then tighten up the swivel thing.

How I know is that I had the same bushing/spacer on another boat I had and each time I took it out the steering got a bit sloppier, not being in the frame of mind to think the bushing was failing I wrote it off to a bad cable and let it go for the time being, long story short, bolt broke in the middle of the freakin' lake, first day of a 3 day trip, I was pissed.

Alright, so I went and got the swivel kit for my pump and I still have to run washers to hook everything up.  It solved my alignment problem a little, still rubs the side of the shaft on the tube but not as bad.   
The thing is, when I go to hook up my swivel kit to my steering arm, the arm and tube are so rigid that I have to run washers under the swivel to bring it up and meet it with the steering arm.
So it brings it to my next question......  Is my steering tube supposed to be so tight that it causes the tube to be rigid or will the black bushing that comes with the kit, provide a water tight seal with the nuts being loose enough to allow the tube to move?   

The tube has to be able to move fairly free, the cable tube moves side to side when you steer, if the tube is oversnugged (word?) it could fatigue and possibly fail.

And that would suck!

That helps alot, because when I got the boat... it was tight so I assumed it was supposed to be tight (the nuts on both sides of the steering tube).  So I will buy a new bushing and redo it. 
Will that bushing provide a water tight seal or should I put something on it to help it's water tight ablity?
And thanks for the quick response!!

   Thanks!  I am off to Eddie Marine to get a new seal.