The only potential benefit of dividing the country, not to mention the capital, would be if all Arabs end up moving to their future state and accept Israel as a Jewish state. If all they're going to do is move from territories ceded to that state further into Israel then there is absolutely no point giving up any land. We don't solve either the demographic problem or the security problem, if anything they get worse. Transfer of population is perfectly reasonable if Arabs want self-determination more than they want to destroy Israel's right to exist as a Jewish state. Any excuse they make shows that they really prefer the latter to the former.
Key U.S. House Democrat cites troublesome issues in Iran nuclear deal (Reuters)
from the article: Israel reports jump in Jerusalem Arabs seeking Israeli citizenship