in a tub/barrel the water intake for the impeller is hampered by turbulence and air bubbles try open waters it may be fine

Has this engine been used in salt water? If so, there are a few tiny water passages that can only be checked/cleaned by pulling the powerhead off the adapter, removing the head and exhaust cover.
Don’t know about the test tank, anything is possible. Perhaps there is crud/debris in the tank plugging the water inlets. Perhaps the water level is too low allowing the pump to suck air when the throttle is raised up..Although you mentioned the engine seemed to do the same thing with the prop off also. Are you sure the water level is high enough, it must be over the gearcase/midsection joint…But, I have never heard of any issues with the right angle drive causing a cooling problem…How is the gearcase casting just below the SS impeller plate? This sealing area is very thin, perhaps the casting has eroded away allowing the pump to pull air instead of water.
That seal in the folding section could be suspect also, easy enough to look at when the unit is folded.
These engines are tricky to troubleshoot cooling wise because they do run hot…The exhaust cover is not fully water cooled, raw exhaust hits most areas on the cover plate which is why the covers usually appear burnt… The cylinder head runs hot also. Cooling temperature is supposed to be measured on the stbd side of the powerhead right around the ID core plug….
It might be best to put the engine on a boat and try it…
I had never worked on one of these units until a few months ago. It is tricky to get the powerhead off because the top of the upper driveshaft has a roll pin that must be aligned with a slot in the adapter housing before the powerhead will come off….It is tricky getting that upper water tube and driveshaft back in place properly, took me about three attempts and some words not heard in church…But, at least now my curiosity for knowledge has been quenched…We all know what curiosity does to cats…

try the motor on open water…..report back with findings

water mist sputtering out the back should be warm …not boiling hot

saw a Leroy article recently on this very subject ….. they run hot in a bucket ! so try the lake

Good to hear.

There was a discussion recently on the screen.

https://aomci.org/forums/topic/lightwin-carburetor-screen/

I saw a difference on my 67 without it, but others had different results. Seems like it could have some choke effect since it reduces the overall open area across the throat of the carb.

try placing a home made screen made from some thin metal like aluminum from a coke can to see if things improve. make certain that jet is clean and linkages on the carb throttle plate is properly adjusted