No, Palestinians are citizens, simply second class ones with less rights and more duties. It would be like if you were born in a "democracy" but weren't given some rights because of who you were born to. It's obviously very different from being a tourist in another country.
They're certainly humans worthy of rights and dignity, citizens of the world, and most are citizens of the (partially recognised, limited authority) Palestinian state. But I think it's clear what we are talking about, that the Israeli state is "democratic" in the sense that it has a conventional (if unfair) idea of who its population/demos is, and those are the people eligible to vote for the representatives at the State level.
The situation you describe actually did happen to me, and many others in states without jus soli which are nonetheless widely considered democratic. This is typical in Western Europe, for example.
Israel does not recognize the Palestinian state, ergo all Palestinians are considered permanent residents of Israel, but not given any right, which is the issue.
