Unlike in pretty much all other countries in the World, Israel separates Nationality from Citizenship and there are more rights on the latter than on the former.
Further, uniquelly in the World Israel has different kinds of Citizenship such as Israeli Jew Citizienship and Israeli Arab Citizenship and the former has more rights than the latter.
As with every other piece of hasbara propaganda, those massive bollocks you're parroting are a meaningless façade for external consumption that hides the reality of a State were Apartheid is so deeply entrenched that by law non-Jews have a second class kind of citizenship with less rights than Jews who have a different class of citizenship.
They're both said to be Israelis (as there is but one nationality) and if one ignores all the rest they're both as you say "Israel's citizens", they're just de jure different kinds of Iraeli citiziens with different rights and, as I said in the beginning, most rights there are linked to Citizenship, not Nationality, so for example Israeli Arab Citizens can be denied the right to live in certain places whilst Israeli Jew Citizens cannot.
And to preempt the usual hasbara response to this disclosure: those Arabs don't live there because it's such a great situation, they still live there even though they are second class citizens because they've always lived there as they were born there on what was their family's land before it was stollen from them.