Palestinians have a Palestinian Authority citizenship and passport, and are not Israeli citizens (therefore cannot vote in the Israeli election, and thus have no direct representatives in the Knesset, although there are some Arab-Israeli members of the Knesset who consider themselves Palestinian and do, in some ways, represent them).
It so happens that, as a result of complicated and pretty fucked up history, (a) Israel exercises military control of the West Bank, and (b) A small but extremely loud minority of Israelis have built their homes in the West Bank, and the Israeli army looks after their interests.
The West Bank is NOT officially a part of Israel, has not been annexed, and plans to do so are not even on any table.
Israel used to have exactly the same kind of arrangement (military control, some settlers) in Gaza between 1967 and 2005, at which point, Israeli unilaterally pulled out of Gaza (forcibly moving all Israelis living in Gaza out, and leaving it to Palestinian and PA rule). In a very bloody internal war that also involved fraudulent elections, Hamas took control of Gaza from the PA, and essentially declared war on Israel, causing Israel to enforce a blockade of Gaza. 10 years and thousands of rockets and bombs deployed on both sides later, this is still where it is at.
Partially as a result of the experience of pulling out of Gaza, Israel is reluctant to pull out of the West Bank, which -- with some land trade -- was actually the plan.
I am not taking sides here, but, by western standards, which include (for example) the right of women to drive and not wear head covering, gay people to be gay, the right to drink alcohol, practice any religion you wish, and stuff like that - Israel indeed is the only democracy in the middle east. Hamas executes gay people. Saudi Arabia just jails them IIRC, and alcohol is verbotten even if you are Christian.