If 'all Arab residents are given a choice to pledge allegiance to Israel', they would be silly not to, because they would be 40%+ of the population and rising (over 50% if you include Gaza in your kind offer). So 'Israel' controlling the courts, textbooks , police etc (by which I suspect you mean 'Jews') would quickly become 'Palestine' and 'Arabs' controlling all these things. Quite right too, but not sure that is quite what you had in mind. Your proposal is fatally flawed in another respect anyway - it would of course be illegal for Israel, as the temporary military occupier, to annex occupied land, can't be done legally and wouldn't be accepted any other way, unless the PA concurred.
Police arrest 18-year-old Palestinian suspected in Old City stabbing (Haaretz)
from the article: UN probe must take West Bank out of Israeli hands