From The US State Dept:

The Intelligence Reform and Terrorism Prevention Act of 2004 requires that by January 1, 2008, travelers to and from the Caribbean, Bermuda, Panama, Mexico and Canada have a passport or other secure, accepted document to enter or re-enter the United States. In order to facilitate the implementation of this requirement, the Administration is proposing to complete it in phases following a proposed timeline, which will be published in the Federal Register in the near future.

In the proposed implementation plan, which is subject to a period of initial public comment, the Initiative will be rolled out in phases, providing as much advance notice as possible to the affected public to enable them to meet the terms of the new guidelines. The proposed timeline will be as follows:

* December 31, 2006 - Requirement applied to all air and sea travel to or from Canada, Mexico, Central and South America, the Caribbean, and Bermuda.
* December 31, 2007 - Requirement extended to all land border crossings as well as air and sea travel.

This is a change from prior travel requirements and will affect all United States citizens entering the United States from countries within the Western Hemisphere who do not currently possess valid passports. This new requirement will also affect certain foreign nationals who currently are not required to present a passport to travel to the United States. Most Canadian citizens, citizens of the British Overseas Territory of Bermuda, and to a lesser degree, Mexican citizens will be affected by the implementation of this requirement.

Learn more here.