From the Super Mario Wiki
The Mushroom Hammer is one of Toad's special character items in both Mario Kart Arcade GP and its sequel Mario Kart Arcade GP 2. Visually, the Mushroom Hammer appears to have a gold structure with a large hammer head that is colored in a similar way to that of a mushroom (though resembling more closely to that of a Super Mushroom). This mushroom serves as the hammer head.
Whenever Toad gets this item in either Mario Kart game, he will start moving it around in a frenzied way while driving his kart. The hammer (in spite of its looks) is very powerful and can knock away Toad's opponents if they are in his way. It can be used multiple times after initiating its use. After using the hammer for a certain amount of time, it will eventually disappear after a final hit.