This requirement will likely depress American-Canadian tourism. A Canadian wanting to go to Florida or Texas for a week will probably not bother, nor will an American wanting to visit Vancouver or the Canadian side of Niagara Falls. I would guess that less than 20% of Americans own a passport, and given the cost and hassle, I doubt many casual travelers will bother to do so to visit Canada, Mexico, etc. I must wonder if the travel industry will not put pressure on Congress to repeal the new passport regulations.
You would guess correctly regarding Americans with a valid passport. The legislation was crafted with input from the tourism industry. A passport is less expensive than a state drivers license or photo ID, unless you need to expedite it. This common misconception is used by the Democrats to scream "poll tax" whenever there is talk of requiring ID. Even with the passport requirement, illegal immigration will be a problem with respect to Mexico. Simply because their government requires an "exit visa" of Mexican nationals. The Canadian impact will be much lower for two reasons; stable government and economic policies, combined with sound emigration - immigration policies. It is very unusual for a Canadian national to overstay a NAFTA visa, or tourist visa.
"The U.S. State Department issued a record 7,300,667 passports in fiscal year 2003, which ended Sept. 30, including first-time passports and renewals. The record followed two years of declining passport numbers, according to the department’s Bureau of Consular Affairs. The previous record of 7,292,182 was set in 2000. The increase brings the total number of valid passports to an estimated 59 million or about 21 percent of Americans, the highest percentage ever. Surges in passport applications usually indicate increased overseas travel by Americans, especially to Europe, as they did in the years 1993 through 2000. While this was not the case in 2003—overseas travel has declined because of the Iraq war, the SARS outbreak in Asia and concerns over the economy—the passport figures may be a strong positive indicator for 2004."
http://www.travelagentcentral.com/travelagentcentral/article/articleDetail.jsp?id=75568
Most recent data indicates 21%. That is still pretty low for a developed country.