Just as a note, in general the term used for Austria in English is Archduchy, from Erzherzogtum as opposed to Großherzogtum, which is more commonly used for states titled 'Grand Duchies'.

With that little bit of pedantry out of the way, let's get to the meat of your question: the Archduchy of Austria had something very important that the Kingdom of Hungary did not, status as an Imperial Prince. Turning Austria into a province of Hungary would require removing Austria from the Holy Roman Empire, an action that would no doubt be seen as highly scandalous, espescially given that for much of the time where a Habsburg prince was simultaneously Archduke of Austria and King of Hungary, they were also Holy Roman Emperor. To remove the Emperor's home territory from the Empire would have been to undermine their own standing and powerbase within the Empire. The nobility of Austria would likely have been very, very opposed to such a move, as being a member of the Imperial nobility carried several benefits that simply being members of Hungarian nobility would not. For one, they could claim certain rights and privileges as part of their rights as members of the Holy Roman Empire, which would not have been available to them if they were Hungarian, rather than Imperial nobility. While the precise nature of these rights and privileges were often debated, imposition of Hungarian laws onto an Imperial territory would no doubt have been seen as a serious infringement at the very least. Furthermore, there was an added element of prestige to being the subject of an Emperor, rather than a "mere" King, which also would have increased resistance amongst Austrian nobility to the notion of Austria as a province of Hungary.

Additionally, the Habsburgs had heavily invested in the idea of Austria as a "special" state within the Holy Roman Empire. With the Golden Bull of 1356, several nobles within the Empire had been identified as the "Prince-Electors", who--in addition to the right to vote on the next Holy Roman Emperor--also gained a wide variety of special rights and priviliges that elevated their territories to a status higher than most other Princes of the Empire. The (forged) Privliegium Maius had raised the then Duchy of Austria to the rank of Archduchy, and granted it many of the same rights and priviliges of the Prince-Electors. Removing Austria from the Empire and constituting it into Hungary would have meant abandoning the status of Archdukes within the Empire that the Habsburgs had worked very hard to get. Notably, the Habsburgs never seemed to have wanted to raise their Austrian territories to the status of a Kingdom, considering the Archducal title to be equivalent or superior to the royal one. Even when Franz II abdicated and dissolved the Holy Roman Empire, becoming Emperor Franz I of the Austrian Empire, he remained Archduke of Austria, not King of Austria. There was a great deal of weight attached to the Archducal title, and the Habsburgs would have been loathe to give it up. Finally, while many Imperial princes sought out a royal title to increase their prestige (i.e. the Dukes of Savoy, Margraves of Brandenburg, Dukes of Saxony, etc.) the Habsburgs had little need to do so. After all, they already held an Imperial title, why would they need to try and claim a 'mere' royal one? Espescially when they already had two.

Finally, I think it's important that--in this time period--"annexation" as we think of it now, wherein a territory is fully encompassed into a different state, complete with the imposition of the incorporating state's laws. Many of the polities we see on early modern maps of Europe, like "Spain", "England", and "France" are really what we would call "composite monarchies". They consist of a variety of territories, each of which often has its own traditions, institutions, and rules of governance. As an example, even though we usually see "Spain" as a single entity on the map, in actuality the "King of Spain" was simply the unification in a single person the King of Castille, the King of Aragon, and others, with the crowns of Castille and Aragon each maintaining their own institutions and estates for governance. Without the central bureaucracy that we would come to see in modern states, these institutions and local nobility were vital to achieving any kind of "rule" over a territory, and their support was usually conditional on a recognition and confirmation of their rights and priviliges. This means that the kind of incorporation you're discussing here was extremely difficult, and not something to be taken lightly.

So to sum it up: 1) incorporating Austria into Hungary would have undermined Habsburg claims and power within the Holy Roman Empire; 2) Austrian nobility would have heavily resisted any attempt to convert them into Hungarian nobility; 3) attempting such an integration would have been extremely difficult, even for the most powerful of monarchs.

I hope this has helped to answer your question. Please feel free to ask any follow ups.