Well, the final answer is: Yes, you can test drive a car without allowing the dealer to photocopy your license...IF you can find a dealer who doesn't think they require this.
When dealers started doing this before there were laws protecting against unwanted/unrequested credit checks, they were doing it for just that purpose so that when you return from your test drive they would be ready with your approval info to tell you that you can "take the car home today" to help "make up your mind for you," and quicker. Federal laws now protect against this type of credit check, however, most dealers are still in the habit of asking for it, and many use it to build a customer profile ahead of time, with which they will begin sending letters and discount offers and other such inticements to get you to return to their dealership with some money. Many dealers still claim that they need it for insurance reasons...THEY DO NOT! When you let your friend, mother, brother, etc. borrow your car, does your insurance company require you to take a copy of their license or risk not having a claim covered if they are involved in an accident in your car? ...Exactly, they don't, and no insurance company does--I happen to be an underwriter for Farm Bureau Insurance. More specifically, did your insurance company take a copy of YOUR license when you purchased your policy? ...Probably not. Even if you or the person you allow to drive your vehicle does not have a driver's license or a valid license, in most states (unless otherwise outlined in your policy), the insurance company must still pay, because of your permissive use clause (which may be where you would find such an exception stating that an unlicensed person might not be covered).
THE BOTTOM LINE IS THIS: THIS PRACTICE (WHILE ALL SALESPERSONS/DEALERS WILL ARGUE ALL DAY LONG THAT IT'S NOT) IS 95% FOR MARKETING PURPOSES THESE DAYS. MANY SALESPERSONS DO NOT KNOW THEIR COMPANY'S MARKETING PRACTICES ON THIS. The other 5% on this very well could be for safety reasons...in cities where crime is high, it probably isn't a bad idea to protect your sales staff and your unsold vehicle in the event you have lunatics running around kidnapping sales people & stealing the car, though I can't say I've ever heard of this happening (I'm sure it has though); this copy could be provided to the police, though I'm not sure any lunatic would be stupid enough to give a real driver's license before they go kidnapping someone.
As others have mentioned though, it is the dealership's right to not let you drive their vehicle if you don't follow their rules, so it is best to take copies of your license with you. Yes, some states, Indiana included, allows for the SSN to be listed on the driver's license, though it's rather pointless to do this, unless you just can't remember your and don't carry your card, because many instances where you must have it require the actual SSN card be present as a separate form of ID. So, it is best to be sure you copy your license, then use a black marker to mark out your DLN and SSN (if present) and write "I do not authorize any form of credit check" (just in case), and make additional copies from the marked copy, then toss the marked copy; everyone knows that even when using a black permanent marker, any text from a laser printer can still be read through the marker. This will prevent unwanted credit checks, and will also prevent your info from being stolen in the even that the dealership does not use shredding practices. At this point it won't really matter if you get your copy back or not, because any damage they could do would already be done, though it wouldn't be a bad idea to take it back if you would like to use it again at the next dealer (saves one ink and paper).
I hope this helps explain the rhyme, the reason, the madness, and the responsibility you have to yourself regarding this practice... :)