Yeah, everyone agrees that if you're using it in a racist way (or faggot in a homophobic way) in public then you should absolutely be punished. That's not what we're arguing about though, we're arguing about the public use of it in a non-racist way.

I'd suggest that if someone does report a person for using it in a non-racist way, perhaps have a chat with the 'offender' and the person who made the report. Tell the offender that he should be more careful about who he uses it around in public and explain to the reporter about how the offender wasn't really being racist in his usage of it. We don't need to warn or infract anyone. If it's like some say and there's generally not a lot of reports where the word is being used in a non-racist way, then it wouldn't be much extra effort at all.