They can accept 20% of their population being Muslim, they can't accept > 50%, which is what would happen if they just annex the disputed territories and made everyone citizens (or if they allowed the families of those who fled in the 1940's to come back). Because then they could destroy Israel through a vote. It's the reason going back to the 1940's that Ben Gurion talked about possibly needing to remove the native Arab population in his letters. It's also why the Nakba happened.
This isn't a secret or all that surprising. Israel wants to be both a liberal democracy and Jewish. The only way to have a democratic state that is also tied specifically to an ethnicity/religion is if you ensure that that ethnicity is always the majority. And the Arab population within this territory outnumbers the Jewish population.
It isn't a uniform view within Israel, and there have been many progressive politicians within Israel who have pushed back against the notion. And it's important for me to note that Ben Gurion himself also acknowledged that pushing the Arabs out would be wrong... and wasn't necessarily advocating for it. The history is a bit muddied and he did things to protect Arab citizens as well as sometimes did things to encourage them to leave.
Israel is generally a western style liberal democracy and is informed by the same values. It's why it's a preferable government when compared to the Arab governments. But they also were just fleeing a genocide and desparately desired a homeland where they could control their own destiny. And that sort of desparation allows people to make exceptions for themselves - ie, there's plenty of land elsewhere for the Arabs to go, we need this land bc we have no where else to go. I can be sympathetic to the situation and motivations, while still acknowledging the faults.