Honda GC160A will not rev above 2500 rpm

This 5 hp engine is mounted to a MTD push type leave blower. The entire thing looks like it was rarely used and well cared for except it will not rev above 2500 rpm. The actual history of the machine is unknown. My friend bought it from another guy.

When I first looked at the engine, I noted it was overfilled with oil. Oil poured out of the dip stick hole when the dip stick was removed. I adjusted the oil level but it had been run by my friend with the overfill situation. It starts on the first pull and runs at lower rpm without issue. When the throttle is increased, the rpm increases but only up to 2500 rpm, as verified by my inductive rpm meter. At its highest attained speed with wide open throttle the engine surges mildly and there is some vibration, but nothing crazy. The spark plug shows some mild carbon but it is dry, not wet, and easily brushes off. I checked the spark and it isn’t the bluest spark I’ve ever seen but I think it’s fine. Just to eliminate the plug as a problem, I installed a new one. The gas is new and was treated with Sta-bil when purchased less than 3 weeks ago.

i pulled the carb expecting to see contamination but it was really mild. I completely cleaned the entire carb and reinstalled it. No change. Thinking I overlooked something, I did it again, but had the carb sit in my ultrasonic cleaner first. No change. I looked over the adjustment procedure for the governor and it was properly set. While running, I sprayed starting fluid on each gasket and all fuel lines. No change. I checked valve clearance and compression. Valves were good (exhaust was about .002 too loose, and the compression was 70psi. I did not do a leak down test, but given good valve clearance and compression, I didn’t see the need. 

Thinking it MUST be the carb, I bought a new OEM carb. No change. I bypassed the fuel pump and fuel lines by using my external gravity feed tank to eliminate any possibility of a problem with the pump or the fuel lines. No change. I rechecked the governor adjustment by the manual procedure. It is fine.  

What have I overlooked? My next step is to remove the blower impeller from the engine shaft to eliminate that as a possible cause, but I really do not think that is the problem. With the spark plug removed (so it CAN’T start, I can easily spin the engine crank by spinning the impeller and there are no binding spots anywhere in the rotation.