So how is that different from a historical fiction book on the exact same subject? Obviously Maus is an allegory, but they're both telling the same story of people experiencing the same event, with aspects fictionalized or changed for the purpose of storytelling.

As long as historical fiction is well-researched and respectful and accurate to the events and real-life figures depicted, and as long as it's correctly labeled and not presented as nonfiction, I can't see it as sensationalizing anything.

A final question - what about narrative nonfiction, something like The Killer Angels, where the events of the battle are meticulously detailed and all characters are actual historical figures but the dialogue is fictionalized because obviously we don't know everything that was actually said?

How - huh? How does historical fiction sensationalize an event? Well-written, well-researched HF can provide insight into the lives and experiences of those who didn't have a chance to tell their story. It shouldn't be used at the expense of factual and first-hand accounts, but it's a useful tool.

Edited to add: I also think historical fiction is extremely useful in elementary classroom settings. Depending on the era you're teaching, narrative nonfiction accounts might be scarce or nonexistent at that reading and maturity level. Telling the story of the event through the eyes of a character their age allows them to relate to the story and understand it. It's what made me fall in love with history as a child. Books like The Witch of Blackbird Pond and Steal Away Home and Fortune's Journey and all the diaries in the Dear America Series, the American Girl books, even my problematic-but-beloved Little House series - these are what introduced me to the specific realm of history I find most fascinating as an adult: the often mundane, day-to-day lives of ordinary girls and women who cooked and cleaned and taught school and got married and had relatable feelings and thoughts.