It's totally unserious to ask a candidate to negotiate against himself by providing a ceiling. As the candidate, just say $1M/year and move on to the next employer. If they're not asking a serious question they should not expect a serious answer.
A more generous interpretation is that they want to find out what the market salary is. How are they supposed to know what the market price is if they say their salary range first?
Normally I would agree, but they obviously already have a budget planned for this role as they turned candidates down for being "outside of budget", so I assume they are aware of the range a market salary should be in.