I think you do have to pay tax, but that is just my interpretation of the instructions for Form 1. Read the instructions, specifically, for Line 4 of Form 1:
"If your pension is not exempt, you should generally enter in line 4 the taxable amount reported on your U.S. Form 1040, line 16b, or U.S. Form 1040A, line12b. In some cases, however, Massachusetts law requires an adjustment to the federal amount. Distributions from annuity, stock bonus, pension,profit-sharing or deferred payment plans or contracts described in Sections 403(b) and 404 of the U.S. IRC must be adjusted to account for your contributions that have been previously taxed. Subtract from such income (as reported on your U.S.Form 1040, line 16a, or U.S. Form 1040A, line 12a) the amount of your contributions which was previously taxed by Massachusetts until the total of your taxed contributions is received. If your pension falls into this category, enter the adjusted amount in line 4. "
I have bolded the relevant sections. It appears that you can only exempt your basis in the 403 (b) plan if the basis arises because the contribution was previously taxed by Massachusetts, not another jurisdiction. This is the same sort of double-taxation that a MA taxpayer faces because IRA and solo 401 (k) contributions are not deductible from MA income at the time of contribution, which creates a MA tax basis, even if there is no federal basis. If the MA resident moves to CA, for example, they would still owe CA taxes on the withdrawal, because there is no CA basis. In your case, you have no MA basis so there is nothing to exempt from your MA tax return.
I will ask another MA Superuser to weigh in on this.
