Or the costs of annexation are too high. If they reduced the unhappiness penalty, or made courthouses a lot cheaper, that might work. Even making courthouses expensive but purchasable might make the difference.
Annexing appears to not pay dividends until long after the annexation, which also hurts. Who knows if the game is even going to last that long?
The production costs and maintenance costs of courthouses are so high that razing and resettling is a better option all the time (except on the rare chance a non-capital AI city has a really good world wonder). Captured cities end up having all their buildings destroyed and have low population anyway.