From the Super Mario Wiki
The Slimy Mushroom is an item in Mario Kart Arcade GP.
Upon being used, the Slimy Mushroom will cause the racer's kart to turn into yellow slime. In this state, the racer can pass through rivals as if they weren't there. This is helpful to prevent coin loss in tightly packed areas on the racetrack, as a Slimy Mushroom user will not lose coins from touching rival karts.