Generally speaking, in theory, the occupying power is supposed to be a care taker - they aren't supposed to take any action that integrates the occupied territory into the main territory. Allowing occupied territories to vote in the occupying power's elections is considered a form of integration. Doing so is considered acquiring territory via annexation, which is illegal under the UN charter.
(See for example Israel when the international community yelled at them for allowing people in Golan Heights to vote).
At its core, democracy requires political equality. The governed people must have a meaningful say in who governs them and how. That is not present in Palestine due to Israeli occupation.
It allows Israelis to vote, including Jewish settlers in occupied territories, but it does not allow occupied Palestinians (many of whom live right next to settlers) to vote.