I don't know why Square-Enix hasn't allowed it for years. It's definitely not like with Rare. Nintendo and Square have collaborated quite a few times, such as Mario Hoops 3-on-3, Mario Sports Mix, Itadaki Street DS, and Fortune Street.
Paper Mario was originally called Super Mario RPG 2 until Square cried foul. The Mario & Luigi series is made by Alphadream, which is managed by Square developers. There was going to be a music remix of "Beware the Forest's Mushrooms" from Super Mario RPG in Super Smash Bros. Brawl until Square cried foul, even with Uematsu working on the game!
I guess Square is just too uptight.