I have an over 30 year-old 4 hp, 2 cycle Mercury (actually a Yamaha with Mercury labels). It's not a long shaft, I bought for a prior Avon and have had it for a bigger airfloor model for the last 19 years.
I think that I'd not cut the transom down right away, I'd play with i) where you are sitting and loading the dingy; ii) the angle of the engine; and, iii) the pitch of the prop first.
When you say "step on", Patrick, do you mean give the engine more gas, or ???
A 3.5 HP should plane with one person on board in flat water -- maybe an adult and modest sized child or load in the dingy. However, you may be expecting too much from that little engine. It's advantage is its weight, fuel efficiency (if you don't go flat-out), and simplicity. It's really not a 9 or 10 HP that will "fly". But then taking the motor on and off the stern pulpits, how can anybody not like a small 2 cycle vs. a 4 cycle?