Pat Shearer, a Peoria, Ariz., police sergeant, was suspended and demoted to officer after his post, showing a local teen holding the shirt, caught national attention in January, The Arizona Republic said Tuesday.
City leaders said his actions brought embarrassment to the Police Department and to the city.
Independent hearing officer Cecil Patterson Jr., in upholding the penalties, said Shearer was aware of the department's social media policy and "intentionally and knowingly" violated it to the discredit of the city.
Shearer expressed regret for his action and agreed discipline was necessary, but said the punishment was excessive, adding his biggest regret is that the incident clouds his 25-year career with the city.
"I hope that before I retire, I will be able to overshadow this incident with something positive," he said.