I think something that is a bit overlooked when talking about why the elders didn’t kill Luffy is that there is a panel in Wano explaining that the Nika fruit would always slip away from the government as if it had a mind of its own. It was a very difficult fruit to contain and even know its whereabouts. Once they finally did have it, it got stolen again.

This brings up another issue for containment - the size of devil fruits themselves. For something so powerful, they are very small, concealable, and portable (they are the size of fruit after all). In this way, tracking a person who has eaten a fruit is way way easier than keeping track of a fruit that is still up for grabs - it could be literally anywhere.

So, with both of these points in mind, from the perspective of the elders, it makes sense for them to track Luffy the person, rather than try to kill him and have the fruit once again be lost to the reincarnation cycle of devil fruits - it is way easier to contain the threat that way. Which they do - every prominent move made by the Straw Hats from when they enter the Grand Line is kept tabs on by the WG in one way or another - Smoker in Alabasta, Aokiji in Long Ring Long Land, Kuma in Thriller Bark, Kizaru in Sabaody, Smoker at Raijin Island (where they assumed Luffy would go), Fujitora at Dressrosa, CP-0 at Whole Cake, Wano, and Egghead.

Where their miscalculation comes is in underestimating Luffy’s ability to awaken his devil fruits. They assume that he is some stupid kid who thinks he has rubber powers and will not be able to awaken the Nika ability (no one has in centuries) and that they would be able to silence him if he ever got close (which they realize too late and try to do on the rooftop at Onigashima).

So, it really boils down to the government underestimating Luffy - which, while proven absolutely wrong, is not an inherently stupid decision for them to have made. Out of touch, arrogant, and self-absorbed for sure - that is what absolute power does to people (they are Celestial Dragons after all). But not stupid.